1. Types of Cost Behavior Patterns
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Types of Cost Behavior Patterns

2. Total Variable Cost Example
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Total Variable Cost Example
Your total long distance telephone bill is based on how many minutes you talk (the more you talk, the higher the bill).
Minutes Talked
Total Long Distance Telephone Bill

3. Variable Cost Per Unit Example
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Variable Cost Per Unit Example
The cost per minute talked is constant (for example, 10 cents per minute).
Minutes Talked
Per Minute Telephone Charge

4. Total Fixed Cost Example
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Total Fixed Cost Example
Your monthly basic telephone bill is probably fixed and does not change when you make more local calls.
Number of Local Calls
Monthly Basic Telephone Bill

5. Fixed Cost Per Unit Example
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Fixed Cost Per Unit Example
The fixed cost per local call decreases as more local calls are made.
Number of Local Calls
Monthly Basic Telephone Bill per Local Call

6. Fixed Costs and Relevant Range
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Fixed Costs and Relevant Range
The company’s normal operating range 90
Total cost doesn’t change for a wide range of activity. It then jumps to a new higher cost for the next higher range of activity.
Relevant Range 60
Rent Cost in Thousands of Dollars 30
, , , Rented Area (Square Feet)

7. Fixed Costs and Step-Variable (or Step-Wise) Costs
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Fixed Costs and Step-Variable (or Step-Wise) Costs
How does this type of fixed cost differ from a step-variable (or step-wise) cost?
Step-variable (or step-wise) costs can be adjusted more quickly and . . .
The width of the activity steps is much wider for the fixed cost.

8. Step-Variable (or Step-Wise) Costs
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Step-Variable (or Step-Wise) Costs
Total cost increases to a new higher cost for the next higher range of activity.
Cost
Total cost remains constant within a narrow range of activity.
Activity

9. A mixed cost has both fixed and variable components.
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Mixed Costs
A mixed cost has both fixed and variable components.
Consider the following electric utility example.

10. Variable Utility Charge Fixed Monthly Utility Charge
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Mixed Costs X Y
Total mixed cost
Variable Utility Charge
Total Utility Cost
Fixed Monthly Utility Charge
Activity (Kilowatt Hours)

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The High-Low Method
WiseCo recorded the following production activity and maintenance costs for two months:
To break down the mixed cost, these two levels of activity are used to:
compute the variable cost per unit;
compute the fixed cost; and then
express the costs in equation form Y = a + bX.

12. Changein cost Change in units
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The High-Low Method
Unit variable cost =
Changein cost Change in units
Unit variable cost = $3,600 ÷ 4,000 units = $0.90/unit

13. The High-Low Method Fixed cost = Total cost – Total variable cost
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The High-Low Method
Unit variable cost = $3,600 ÷ 4,000 units = $0.90/unit
Fixed cost = Total cost – Total variable cost
Fixed cost = $9,700 – ($0.90 per unit × 9,000 units)
Fixed cost = $9,700 – $8,100 = $1,600

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The High-Low Method
Unit variable cost = $3,600 ÷ 4,000 units = $0.90/unit
Fixed cost = $9,700 – ($0.90 per unit × 9,000 units)
Fixed cost = $9,700 – $8,100 = $1,600
Total cost = Fixed Cost + Total variable cost Y = a + bX Y = $1,600 + $0.90X