Cost Behavior

means how a cost will

react as changes takes place
in the level of business
activity.
 Planning
requires that management make
decisions based in part on expectations as
to the future.
 Control
is the process of using feedback
information for comparison with
expectations and the implementation of
actions on the basis of that comparison.
 Cost Analysis
is an integral part of the planning and
control function. The key to effective cost
prediction lies in an understanding of cost
behaviour patterns.
1. Variable Cost
costs that change in total as the level
of activity change in the short run and
within relevant change.

Short Run – is the time period long enough

to allow management to change the level
of production within operating capacity.
Relevant Change – is the range activity
within which assumptions relative to
variable cost and fixed cost behaviour are
valid.

EXAMPLES OF VARIABLE COST:

In a Manufacturing Company:
 Direct Materials
 Direct labor
EXAMPLES OF VARIABLE COST:

 Some manufacturing overhead such

as indirect materials, materials handling
cost, energy costs, supplies
 Distribution cost
 Sales commission
In Merchandising Company
 Cost of Sales
 Sales Commissions

In Service Organization
 Direct labor and materials used to
perform the services such as auto repair
and consulting supplies travel
 are costs that remain constant in
total regardless of changes in the level of
activity within the relevant change.

Types of Fixed Cost:

1. Committed fixed cost
2. Discretionary fixed cost
3. Mixed cost
 Relate to the investment in facilities,
equipment and the basic organizational
structure of a firm.
 Two key characteristics of committed
fixed cost are:
a. they are long term in nature
b. they can’t be significantly reduced
even for short periods time without seriously
impairing the profitability.
 Often referred to as managed fixed cost
 Usually arise from annual decisions by
management to spend in certain fixed
cost areas.
 Is one that contains both variable and
fixed cost elements.
 Also known as semivariable costs.
 Common example include:
- Maintenance cost
- Electric Utility Cost
Y= a + bX

Where:
Y= The total Mixed Cost
a= The total Fixed Cost
b= The variable cost per unit
X= The level of activity (the independent
variable)
 Is also called the explanatory variable
cost or cost driver.
 Account Analysis Method
 Industrial Engineering method
 Conference Method
 Quantitative Analysis of Current ans Pasts
Costs Relationships
a. High Low Method
b. Regression Analysis Method
 It makes used of the experience and
judgment of managers and
accountants who are familiar with
company operations and the way
costs react to changes in activity level.
1. Review each cost
account used to
record the costs that
are of the interest.
2. Each major class of
manufacturing
overhead is itemized.
 Estimates cost functions by analyzing the
relationship between inputs and outputs
in physical forms.
1. A study of the physical relation between the
quantities of inputs and each unit of output is
done. This involves the following activities:
a. A detailed step by step analysis of
each phase of each manufacturing process
together with the kinds of work performed, and
time to perform each step is done.
b. Engineering estimates of the
materials required for each unit of productions
are obtained from drawings and specifications
sheets.
2. Cost are then assigned to
each of the physical inputs
(wages, materials price,
insurance charges, etc. )
 Cost function are estimated based on
the analysis and opinion about costs and
their drivers obtained from various
departments of an organization.