ASUNCION, MAY ANN JOYCE B.

BSIE-3A
CLASSIFICATIONS OF PRODUCTION COST
Variable, fixed, semi-variable and stepped fixed costs
These terms relate to how costs behave as the activity level of an
organization changes.
Variable costs: these are directly proportional to the level of
activity.
If the number of units produced doubles, then variable production costs will
double also. An example would be the cost of material used to produce units.
If the number of units sold increases by 20% then variable selling and
distribution costs would increase by 20% also.
On a graph, variable costs would look like:

Fixed costs: constant over a wide range of activity

An example would be the factory rent. It does no matter how many units are
made, the rent is fixed.
On a graph, fixed costs would appear as:

Note that the cost per unit will decrease as the activity level decreases. For
example, say that the rent was $10,000 and 1,000 units were made. Then
you could argue that it takes $10 rent to make a unit ($10,000/1,000).
If, however, 10,000 units were made, the rental cost per unit would be only
$1 ($10,000/10,000). Higher production volumes are making better use of
the fixed resource.
Semi-variable costs have a fixed element and a variable element.
An example would be a telephone bill. Usually there is a fixed cost for the
line rental then each minute of telephone calls causes an additional cost.
On a graph, fixed costs would appear as:

Stepped fixed costs: constant over a range of activity then a sudden

increase, then constant again
An example would be the salary of supervisors. One supervisor for up to six
workers, two for up to 12 workers, etc.
On a graph, stepped fixed costs would appear as: