# Types of Cost Behavior Patterns

## Presentation on theme: "Types of Cost Behavior Patterns"— Presentation transcript:

Types of Cost Behavior Patterns

Total Variable Cost Example
Next Page Click Here 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

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

Total Fixed Cost Example
Next Page Click Here 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

Fixed Cost Per Unit Example
Next Page Click Here 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

Fixed Costs and Relevant Range
Next Page Click Here 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)

Fixed Costs and Step-Variable (or Step-Wise) Costs
Next Page Click Here 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.

Step-Variable (or Step-Wise) Costs
Next Page Click Here 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

A mixed cost has both fixed and variable components.
Next Page Click Here Mixed Costs A mixed cost has both fixed and variable components. Consider the following electric utility example.

Variable Utility Charge Fixed Monthly Utility Charge
Next Page Click Here Mixed Costs X Y Total mixed cost Variable Utility Charge Total Utility Cost Fixed Monthly Utility Charge Activity (Kilowatt Hours)

Next Page Click Here 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.

Changein cost Change in units
Next Page Click Here The High-Low Method Unit variable cost = Changein cost Change in units Unit variable cost = \$3,600 ÷ 4,000 units = \$0.90/unit

The High-Low Method Fixed cost = Total cost – Total variable cost
Next Page Click Here 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

Next Page Click Here 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