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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

## 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

## Cost Behaviour Pattern

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

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 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.

## 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

## 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