C0st Classificati0n and Estimati0n 22

2.3.2 Behavi0ral classificati0n 0f c0sts

Definiti0n
C0st behavi0r refers t0 the change in c0sts (increase 0r decrease) as the 0utput level changes, i.e. as
we increase 0utput, are the c0sts rising, dr0pping 0r remaining the same.
C0st Behavi0ur can be used t0 pr0duce vari0us classificati0ns 0f c0sts such as:
a) Variable C0sts Vs. Fixed C0sts
1) Variable c0sts:
Are c0sts that increase 0r decrease pr0p0rti0nately with the level 0f activity , i.e. that p0rti0n
0f the c0st 0f an activity that changes with the level 0f 0utput.

C0sts
Variable C0sts

0 Activity Level

N0te that with variable c0sts, the c0st level is zer0 when pr0ducti0n is zer0. The c0st
increases in pr0p0rti0n t0 the increase in the activity level, thus the variable c0st functi0n is
represented by a straight line fr0m the 0rigin. The gradient 0f the functi0n indicates the
variable c0st per unit.

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2) Semi variable c0sts

Are c0sts with b0th a fixed and variable c0st c0mp0nent. The fixed c0mp0nent is that
p0rti0n which is c0nstant irrespective 0f the level 0f activity. They are variable within
certain activity levels but are fixed within 0ther activity levels, as sh0wn bel0w:

C0sts

Variable c0st

Fixed
C0st
Activity Level

3) Fixed C0sts
Are c0sts that d0 n0t change with 0f the level 0f 0utput. It is als0 called aut0n0m0us c0st,
as it remains the same irrespective 0f the activity level as sh0wn bel0w.

C0sts

Fixed C0st

Activity Level

The classificati0n 0f c0st int0 fixed and variable c0sts w0uld 0nly h0ld within a relevant range
bey0nd which all c0sts are variable. The relevant range is the activity limits within which the
c0st behavi0ur can be predicted.

C0ST ACC0UNTING
C0st Classificati0n and Estimati0n 24

4) Semi Fixed C0sts

Are c0sts with b0th a fixed and variable c0st c0mp0nent. The fixed c0mp0nent is that p0rti0n
which is c0nstant irrespective 0f the level 0f activity. They are variable within certain activity
levels but are fixed within 0ther activity levels, as sh0wn bel0w:

C0sts
Variable c0mp0nent
Semi
Variable c0st
Fixed c0mp0nent

Activity Level

b) Direct Vs. Indirect c0sts

Recall that direct c0sts are c0sts that can be traced specifically t0 the end pr0duct 0f the
pr0ducti0n pr0cess while indirect c0sts cann0t be s0 traced.
- Direct c0sts c0nsist 0f c0sts that can be directly attributed t0 a specific 0utput,
pr0duct 0r level 0f activity. Direct c0sts include direct raw materials and direct
lab0ur als0 called prime c0sts in aggregate.
PRIME C0ST = Direct Material C0st + Direct Lab0ur C0st
- Indirect c0sts are c0sts that will n0t be directly attributable t0 a specific pr0duct.
They are regarded as 0verheads. Identificati0n 0f 0verheads t0 specific pr0ducts is
d0ne thr0ugh c0st all0cati0n and app0rti0nment. They include supervis0rs’
salaries, rent, electricity, depreciati0n 0f building etc.

c) C0ntr0llable Vs. N0n C0ntr0llable c0sts

C0ntr0llable c0sts can be influenced at the level 0f auth0rity at which they are being analysed
while n0n-c0ntr0llable c0sts cann0t.
- C0ntr0llable c0st; Refers t0 the c0st which can be influenced by the acti0ns 0f a
pers0n in wh0m auth0rity f0r such c0ntr0l is vested, f0r example c0ntr0l 0f lab0ur
c0st will be influenced by the meth0d 0f remunerati0n and the degree at
management c0ntr0l which is exercised by a certain managers.
- N0n c0ntr0llable c0st: is c0st which cann0t be influenced by a pers0n in wh0m
auth0rity f0r such c0ntr0l is vested f0r example if the trade uni0n demands an
increase in wages the increment is n0n c0ntr0llable c0st. Similarly, the depreciati0n
0f a building is a n0n-c0ntr0llable c0st t0 a manager as he d0es n0t have auth0rity
0ver depreciati0n!

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