Cost Behavior
Rick Stephan Hayes, Ph.D., CPA
California State University at Los Angeles
Based on MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES
By Dennis Caplan, Oregon State University
CHAPTER 4: Cost Behavior
– Understanding Cost behavior is important for
making decisions
• Fixed costs– remain constant – i.e. rent
• Variable costs – dollar amount varies in direct
proportion to changes in activity level – i.e. cost
of Battery in car
• Mixed costs– contains both variable and fixed
elements – caterer license fee of $10,000/year
plus $3/dinner party
• Stepped costs – variable but increases in big
chunks – i.e. Wages of maintenance workers
Fixed Costs
• Fixed costs do not vary with the production
level. Total fixed costs remain the same, within
the relevant range. However, the fixed cost
per unit decreases as production increases,
because the same fixed costs are spread over
more units. The following two charts depict
this relationship between fixed costs and
output volume.
Fixed Cost Example
• In this example, fixed costs are $50,000. The
first chart shows that fixed costs remain
$50,000 at all production levels from 100 units
to 1,000 units. The second chart shows that
the fixed cost per unit decreases as production
increases. Hence, when 100 units are
manufactured, the fixed cost per unit is $500
($50,000 ÷ 100). When 500 units are
manufactured, the fixed cost per unit is $100
($50,000 ÷ 500).
Total Fixed Costs
Total fixed cost
60000
50000
40000
30000
20000
10000
0
100
500
900
Production level (units produced)
Fixed Cost Per Unit
Fixed cost per unit
1000
800
600
400
200
0
50 100 150 200 250 300 350 400 450 500
Production level (units produced)
Variable Costs
• Variable costs vary in a linear fashion with the
production level. However, when stated on a
per unit basis, variable costs remain constant
across all production levels within the relevant
range. The following two charts depict this
relationship between variable costs and
output volume.
Variable Cost Example
• A good example of a variable cost is materials. If
one pair of pants requires $10 of fabric, then
every pair of pants requires $10 of fabric, no
matter how many pairs are made. The fabric cost
is $10 per unit at every level of production. If one
pair is made, the total fabric cost is $10; if two
pairs are made, the total fabric cost is $20; and if
1,000 pairs are made, the total fabric cost is
$10,000. Hence, the total cost is increasing and
linear in the production level
Total Variable Costs
10000
8000
6000
4000
2000
90
0
50
0
0
10
0
Total variable cost
12000
Production level (units produced)
Variable Costs Per Unit
variable cost per unit
12
10
8
6
4
2
0
100
500
900
Production Level (units produced)
Mixed Costs
• If, within a relevant range, a cost is neither
fixed nor variable, it is called semi-variable or
mixed. Following are two common examples
of mixed costs.
– Initial Fixed cost and then variable cost.
– Step cost
14000
12000
10000
8000
6000
4000
2000
90
0
50
0
0
10
0
Total cost
In this example, fixed and then variable, although the total cost line increases
in production, it does not pass through the origin because there is a fixed cost
component. An example of a cost that fits this description is electricity. A
fixed amount of electricity is required to run the factory air conditioning,
computers and lights. There is also a variable cost component related to
running the machines on the factory floor. The fixed component in this
example is $3,000 per month. The variable cost component is $10 per unit of
output. Hence, at a production level of 500 units, the total electric cost is
$8,000 [$3,000 + ($10 x 500)].
Production level (units produced)
7000
6000
5000
4000
3000
2000
1000
0
10
0
20
0
30
0
40
0
50
0
60
0
70
0
80
0
90
0
10
00
Total cost
The mixed cost illustrated below is called a step function. An example of such
cost behavior would be the total salary expense for shift supervisors. If the
factory runs one shift, only one shift supervisor is required. In order for the
factory to produce above the maximum capacity of a single shift, the factory
must add a second shift and hire a second shift supervisor, so that total shift
supervisor salary expense doubles. If the factory runs three shifts, three shift
supervisors are required.
Production level (units produced)