Management Accounting and

Control System (DBA 552)

Lesson 3: Cost Behavior

Presented By: Dr. Richard Oliver F. Cortez, MBA, DBA, FRIBA, AFBE
AMA University
TOPICS TO BE COVERED:
• Total Variable Cost
• Variable Cost per unit
• Step-Variable cost
• Total Fixed cost
• Fixed cost per unit
• Step-Fixed cost
• Semi-variable cost
• Cost Behavior in some industries
LEARNING OUTCOMES:

1. Explain the relationships between cost estimation, cost

behavior, and cost prediction.
2. Connect the behavior of the following types of costs:
variable, step-variable, fixed, step-fixed, semi-variable
(or mixed), and curvilinear
3. Survey the relevant range in using a cost behavior
pattern for cost prediction.
4. Implement engineered costs, committed costs, and
discretionary costs.
5. Appreciate the value of costing in business
 Introduction

Cost Cost Cost

estimation behavior prediction

Process of Relationship Using knowledge

determining between of cost behavior
cost behavior, to forecast
often focusing
cost and level of cost at
on historical activity. a particular
data. activity. Focus
is on the future.

6-4
Your total Pay Per View bill is based on how many
Pay Per View shows that you watch.
Total Pay Per View Bill

Number of Pay Per View shows watched

6-5
Variable Cost Per Unit Example
The cost per Pay Per View show is constant. For
example, $4.95 per show.

Cost per Pay Per View

show
Number of Pay Per View
shows watched
6-6
 Step-Variable Costs

Total cost remains

constant within a
narrow range of
activity.

Cost
Activity

6-7
 Step-Variable Costs
Total cost increases to a
new higher cost for the
next higher range of
activity.

Cost
Activity

6-8
 Total Fixed Cost Example
Your monthly basic cable TV bill probably does not
change no matter how many hours you watch.
Monthly Basic
Cable Bill

Number of hours watched

6-9
 Fixed Cost Per Unit Example
The average cost per hour decreases as more hours
are spent watching cable television.

Monthly Basic cable Bill

per hour watched

Number of hours watched

6-10
 Step-Fixed Costs

Example: Office space is

available at a rental rate
of $30,000 per year in
increments of 1,000
square feet. As the
business grows more
space is rented,
increasing the total cost.
Continue

6-11
 Step-Fixed Costs
Total cost doesn’t change for a wide range of activity, and then
jumps to a new higher cost for the next higher range of activity.

90
Thousands of Dollars
Rent Cost in

60

30

0 1,000 2,000 3,000

Rented Area (Square Feet)

6-12
 Step-Fixed Costs

Step-variable costs can be

adjusted more quickly and . .
.
How does this type The width of the activity
steps is much wider for the
of fixed cost differ step-fixed cost.
from a step-variable
cost?

6-13
 Semivariable Cost

A semi-variable
cost is partly
fixed and partly
variable.
Consider the
following
example.

6-14
 Semivariable Cost
Slope is
variable cost
per unit
of activity.
Total Utility Cost

Variable
Utility Charge

Fixed Monthly
Utility Charge
Activity (Kilowatt Hours)

6-15
Cost Behavior in Other Industries
Merchandisers Service Organizations
Cost of Goods Sold Supplies and travel

Examples of variable costs

Manufacturers Merchandisers and

Manufacturers
Direct Material, Direct
Labor, and Variable Sales commissions and
Manufacturing Overhead shipping costs

6-16
Cost Behavior in Other Industries
Examples of fixed costs

Merchandisers, manufacturers, and

service organizations
Real estate taxes
Insurance
Sales salaries
Depreciation

6-17
 CREDIT

goes to for the

images used in the presentation
 Thank you
very much for
listening!