Classification of Costs by Behaviour

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Classification of Costs by Behaviour

Fixed: costs are fixed over a range of output levels e.g. rent and rates, the cost per unit falls as output increases

(http://accountingexplained.com/managerial/cost-behavior/images/fixed-cost-behavior.png)

Behaviour of Fixed Costs   Behaviour of Fixed Costs per Unit

     Stepped Fixed Cost

Semi-variable: combine fixed and variable elements e.g. phone bill - fixed rental and charge per unit

Variable: costs vary directly with output e.g. direct materials, direct labour

(http://accountingexplained.com/managerial/cost-behavior/images/variable-cost-behavior.png)

   Behaviour of Variable Costs               

Fixed and Variable Costs in Decision-making: 

  • Using a labour-intensive process with a large number of employees supported by basic machinery (high variable costs: direct labour, low fixed costs: depreciation of machinery)
  • Using expensive machinery in an automated process with few employees (low variable costs, high fixed costs)
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