1. Cost Behavior and Relevant Costs
Chapter 4
Cost Behavior and Relevant Costs

2. Introduction
What is the nature of costs and how are they used in decision making?
Do they increase or decrease as production volume changes?
Do they remain stable?

3. Introduction
The concept of predictable cost behavior based on volume is very important to the effective use of accounting information for managerial decision making.
As production volume changes, costs may
Increase
Decrease
Remain the same

4. The Behavior of Fixed Costs
Fixed costs remain the same in total, but may vary per unit when production volume changes.
Examples: Rent, Depreciation, Salary of a Plant Manager, Insurance, Property Taxes
Fixed Cost Per Unit $ $
Total Fixed Costs 4 10 2
1.33 25 50 75 25 50 75
Volume
Volume

5. The Behavior of Variable Costs
Variable costs vary in direct proportion to changes in production volume, but are fixed when expressed as per-unit amounts.
Examples: Direct material, direct labor, and other unit-level costs like factory supplies $
Total Variable Costs
Variable Cost Per Unit $
150
100 20 50 25 50 75 25 50 75
Volume
Volume

6. Relevant Range Within the relevant range, fixed costs
are constant in total and vary per unit,
and variable costs vary in total and are
constant per unit.

7. Step Costs
Step Costs remain constant within a relevant range of production.
Example: Janitorial services within a company that manufactures desks
0-7,500 desks
7,501-15,000 desks
1 Janitor
2 Janitors
$25,000
$50,000

8. Mixed Costs Fixed and Variable Components of Delivery Van Expense
Fixed: lease payment each month
Variable: Gas, oil, maintenance costs, etc., that vary with the number of deliveries made (and miles driven)

9. Relevant Costs and Cost Behavior
It can be misleading to always view variable costs as relevant and fixed costs as not relevant.

10. Taxes and Decision Making
Managers must consider the impact of taxes when making decisions.