TYPES OF COST - BASED ON COST BEHAVIOR

TYPES OF COST – BASED ON COST BEHAVIOR

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Cost behavior

 

  • Fixed cost
  • Variable costs
  • Semi variable costs
  • Stepped fixed

Fixed Cost

This cost remains fixed over certain period of time irrespective of units produced. For example rent of building .It’s important to note that fixed cost remains fixed for certain level of activity , after which it increases

Although total cost is fixed for a period but as the number of units increases, the fixed cost per unit decreases.

 

 Fixed cost 100,000 100,000
Number of units produced 100 200
Cost per unit 100,000/100 = 1000 100,000/200 = 500

 

 

FIXED COST

FIXED COST

 

Variable Cost

Cost that increases with number of units produced. E,g material cost per unit. Total of variable costs increases per but per unit variable cost remain same

 

Variable  cost 100,000 120,000
Number of units produced 100 200
Cost per unit 100,000/100 = 1000 120,000/200 = 1000

 

Variable Cost

Variable Cost

 

Semi Variable Cost:

Cost that is partly fixed and partly variable .Such type of costs contain both fixed and variable portions.

Examples

  • Telephone bill
  • Electricity bill
 

Suppose According  to electricity bill rules ,gave following rates are applicable:

Fixed cost up to 300 units =$ 3000

Units higher than 300 =   20$ per unit

 

If company ABC uses 500 units then

 

For first 300 units =   3000

For next 200 units = 200* 20 = 4000

Total cost = $ 7000

Semi Variable Cost
Semi Variable Cost

 

Stepped Costs:

Cost that is fixed for certain limit, but after that limit it increases. For example fix rent of building is $10,000 with capacity to produce 100,000 units.  If production exceeds 100,000 units company have to take some other building on rent, which will increase fixed cost of $10,000. Let’s say other rent of other building taken on rent is again 100,000 with capacity to produce another 10,000 units, so cost will again remain fix till 20,000 units and will step up ,if production increases more than 20,000 units

 

Stepped Costs
Stepped Costs

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