Types of Costs

Sensitivity: Internal Management Accounting

Classifying costs
Costs can be classified in a number of different ways.

▪ Element costs are classified as materials, labor or expenses (overheads).

▪ Nature costs are classified as being direct or indirect.
▪ Behavior costs are classified as being fixed, variable, semi-variable or stepped fixed.
▪ Function costs are classified as being production or non-production costs.

Sensitivity: Internal Management Accounting

Cost Card

Sensitivity: Internal Management Accounting

Classify each expense – Class Activity

Sensitivity: Internal Management Accounting

Cost Behavior

Variable costs are costs that tend to vary in

total with the level of activity. As activity
levels increase then total variable costs will
also increase.

Fixed cost is a cost which is incurred for an

accounting period, and which, within certain
activity levels remains constant.

Sensitivity: Internal Management Accounting

Cost Behavior

Stepped fixed costs is a type of fixed cost

that is only fixed within certain levels of
activity. Once the upper limit of an activity
level is reached then a new higher level of
fixed cost becomes relevant.

Semi-variable costs contain both fixed and

variable cost elements and are therefore partly
affected by fluctuations in the level of activity.

Sensitivity: Internal Management Accounting

The high/low method - Example

Sensitivity: Internal Management Accounting

The high/low method

Sensitivity: Internal Management Accounting

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Sensitivity: Internal Management Accounting