C os t B e ha v i o r

Outline

1.Fixed costs
2.Variable Costs
3.Semi-variable Costs
4.Mixed Costs
5.Step Costs
 Familiarize yourself with this graph

Total amount of cost

Level of activity (cost driver)

Fixed costs
Costs that are constant in total as the level of
activity changes.

Example: Let us look at the situation of a

secretary of a law firm. The employment contract
provides that the employee is to receive P10,000
monthly regardless of the number of clients. The
table and the graph for this cost follow:
Fixed costs
Number of clients a month Amount of monthly salary
100 P 10,000
200 P 10,000
400 P 10,000
800 P 10,000
 Fixed cost

Monthly salary

Number of clients (cost

driver)
Variable costs
Costs that in total changes in direct proportion as
the level of activity changes.

Example: Using again the law firm situation, let

us assume that some lawyers employed in the
firm are part-timers paid P400 per hour. This
means that they are paid more when they spend
more hours serving clients. The table for this cost
and the graph follow:
Variable costs
Number of hr served Amount of professional fee
100 P 40,000 The total
When the hours
double… 200 P 80,000 professional fees
doubles
300 P 120,000
400 P 160,000
 Variable cost

Amount of professional
fee

Number of hr served (cost

driver)
Semi-variable costs
Costs that are variable in nature but its rate of
change is not constant.
Example: The law firm purchases bond papers
under a deal with a store which provides the
following:
First 100 reams – P300 per ream
101st to 200th ream – P280 per ream
201st to 300th ream – P260 per ream
Semi-variable costs
The computation of the total cost of the reams at various level of
purchases and the graph for the cost follow:
Number of
reams First 100 Second 100 Third 100 Total Cost
bought
100 The number
₱ 30,000.00
of reams The amount increased ₱ 30,000.00
but not twice
200 doubled₱ 30,000.00 ₱ 28,000.00 ₱ 58,000.00
300 ₱ 30,000.00 ₱ 28,000.00 ₱ 26,000.00 ₱ 84,000.00
100 reams x P280 /ream100 reams x P260 /ream
100 reams x P300 /ream
Semi-variable cost

Total cost

Number of reams bought

(cost driver)
 Semi-variable cost
A semi-variable cost may also exhibit this behavior:

Total amount of cost

Level of activity (cost driver)

End of Part 1 of 2
Mixed costs
Costs that have both fixed and variable
component.

Example: Let us say that the law firm rents an

office space. The monthly rent payment is a fixed
amount of P20,000 plus 5% of service revenue.
The table and graph for this cost at different
levels of service revenue follow:
 Mixed costs
Variable
Revenue for
Fixed portion
The fixed portion portion = 5% Total rent
the month did not change
of revenue
₱ - ₱ 20,000.00 ₱ - ₱ 20,000.00
When the ₱ 50,000.00 ₱ 20,000.00The variable ₱ 2,500.00 ₱ 22,500.00
revenue doubled portion doubled.
₱ 100,000.00 ₱ 20,000.00 ₱ 5,000.00 ₱ 25,000.00
₱ 150,000.00 ₱ 20,000.00 ₱ 7,500.00 ₱ 27,500.00
₱ 200,000.00 ₱ 20,000.00 ₱ 10,000.00 ₱ 30,000.00
 Mixed cost

Variable
component
Rental payment

Fixed
component

Service revenue (cost driver)

Step costs
Display a constant level of total cost for a range
of level of activity and then jump to a higher level
(step) at some point, where they remain constant
for a similar range of output.
Example: Suppose the law firm is charged P300
per 100 kilowatt hour (kwh) of electricity. The
table and graph for this cost are shown on the
next slides.
Step costs

Kwh Electricity
consumed expense

0 to 100 ₱ 300.00
101 to 200 ₱ 600.00
201 to 300 ₱ 900.00
301 to 400 ₱ 1,200.00
 Step cost

Electricity expense

Kwh consumed (cost driver)

Let us now summarize the types of
cost behavior we discussed
Fixed costs

Variable costs
Semi-variable costs
Mixed costs

Step costs
“Once you stop learning, you start
dying.”

- Albert Einstein
Thank you and enjoy learning!