ASSIGNMENT # 2

Submitted to: Sir Tahir Mehmmood

Submitted by: Ahmad Shabbir
ROLLNO#LCM-3576
Class – Section: BBA (3)-B
Cost behavior is an indicator of how a cost will change in total when there is a change in some
activity. In cost accounting and managerial accounting, three types of cost behavior are
usually discussed:

Fixed Costs

Fixed cost are those which do not change with the level of activity
within the relevant range. These costs will be incurred even if no units
are produced. For example rent expense, straight-line depreciation
expense, etc.

FIXED COST PER UNIT decreases with increase in production.

Following example explains this fact:

Total Fixed Cost $30,000 $30,000 $30,000

÷ Units Produced 5,000 10,000 15,000
Fixed Cost per
$6.00 $3.00 $2.00
Unit

Variable Costs
Variable costs change in direct proportion to the level of production.
This means that total variable cost increase when more units are
produced and decreases when less units are produced. Average
variable cost i.e. variable cost per unit is constant . For example

Total Variable Cost $10,000 $20,000 $30,000

÷ Units Produced 5,000 10,000 15,000
Variable Cost per
$2.00 $2.00 $2.00
Unit

Mixed Costs
Mixed costs or semi-variable costs have properties of both fixed and
variable costs due to the presence of both variable and fixed
components in them. An example of mixed cost is telephone expense
because it usually consists of a fixed component such as line rent and
fixed subscription charges as well as variable cost charged per minute
cost. Another mixed cost example is delivery cost which has a fixed
component of depreciation cost of trucks and a variable component of
fuel expense.

Since mixed cost figures are not useful in their raw form, therefore
they are split into their fixed and variable components by using cost
behavior analysis techniques such as High-Low Method, Scatter Graph
Method and Regression Analysis.

The following table shows a comparison of different costs

classifications based on behavior:

Category Fixed Costs Variable Costs Mixed Costs

Total cost Constant Changes Change with output
proportionately but not
 with output proportionately
Decreases with
Decreases
Cost per increase in output but
with increase Constant
unit less than the decrease
in output
in fixed cost per unit
Plant Telecommunication
Fuel expense,
depreciation, costs, senior
Examples wages, raw
property management salaries,
materials
taxes transportation cost