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Chapter 4

Cost Behaviour
Ibrahim Sameer (MBA - Specialized in Finance,
B.Com Specialized in Accounting & Marketing)

www.ibrahimsameer.wordpress.com

Introduction to Cost Behaviour


Cost behaviour is the way in which costs are
affected by changes in the volume of output.
The basic principle of cost behaviour is that as the
level of activity rises, costs will usually rise. It
will cost more to produce 2,000 unit of output than
it will cost to produce 1,000 units.

Cost Behaviour Pattern


Fixed cost
A fixed cost is a cost which tends to be unaffected

by increases or decreases in the volume of output.

Cost Behaviour Pattern


Examples of fixed cost include:
The salary of the MD (per month or per annum)

The rent of a single factory building (per month or


per annum)
Straight line depreciation of a single machine
(per month or per annum)

Cost Behaviour Pattern


Step cost
A step cost is a cost which is fixed in nature but

only within certain level of activity.

Cost Behaviour Pattern


Examples of step cost include:
Basic pay of employees is nowadays usually

fixed, but as output rises, more employees are


required.
Royalties

Cost Behaviour Pattern


Variable cost
A variable cost is a cost which tends to vary

directly with the volume of output. The variable


cost per unit is the same amount for each unit
produced.

Cost Behaviour Pattern


Non linear or curvilinear Variable cost
If the relationship between total variable cost and

volume of output can be shown as a curved line


on a graph, the relationship is said to be
curvilinear.

Cost Behaviour Pattern


Semi Variable cost
A semi-variable/semi-fixed/mixed cost is a cost

which

contains

both

fixed

and

variable

components and so is partly affected by changes


in the level of activity.

Cost Behaviour Pattern


Examples of these costs include the following:
Electricity and gas bill

FC = standing charges
VC = charge per unit of electricity used

Cost of running car


FC = road tax, insurance

VC = petrol, oil, repair

Cost Behaviour Pattern


Cost behaviour and cost per unit
The following tables relates to different level of

production of the zed. The variable cost of


producing a zed is $5. Fixed costs are $5,000.

Cost Behaviour Pattern

What happen when activity level rise can be


summarised as follows:

Cost Behaviour Pattern


The variable cost per unit remain constant.
The fixed cost per unit falls

The total cost per unit falls

Determining the fixed & variable


elements of semi-variable cost
The fixed & variable elements of semi variable
cost can be determined by the high low method.
Steps in high low method are as follows:

Determining the fixed & variable


elements of semi-variable cost

Linear Equation
A linear equation is a straight line and has the
general form
y = a + bx
where
y = is the dependent variable
x = is the independent variable
a = is a constant, that is fixed amount
b = is also constant, being coefficient of x

Questions & Answers

Thank You

Ibrahim Sameer
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