Cost Behavior

Variable Cost
Fixed Cost
Mixed Costs
 What is a Variable Cost?

• This cost moves, or varies, in

total, in direct proportion with
changes in a level of activity.
• The more the activity, the more
the cost.
• The less the activity, the less the
cost.
 Examples of Variable Costs

Wood used to make furniture. More furniture made equals more wood
used.

Commissions paid to sales personnel. The more that is sold, the more
the commissions will be.
 What is a Fixed Cost?

• This cost stays the same, in total,

regardless of changes in a level
of activity.
• The more the activity, the total
cost does not change.
• The less the activity, the total
cost does not change.
 Examples of Fixed Costs

Rent. The same amount is paid each month.

Insurance premiums. The same amount is paid each month.

Property taxes. What is paid does not vary with any activity.
 What is a Mixed Cost?
• Part variable and part fixed.
• You will have the fixed cost even
if there is zero activity.
• Fixed is where the cost line
intercepts the Y-axis.
• Regardless of the level of
activity, you will have the same
fixed cost.
 What is a Mixed Cost?

• The variable component changes

with the change in activity.

• In this case, how much does the

variable component increase
with an increase of 5 units of
activity?
 Examples of Mixed Costs

Phone. Fixed base cost and cost increases with usage.

Utilities. Fixed base cost and cost increases with usage.

Sales compensation. Not unusual for sales person to be paid a fixed

wage, then a commission for amounts that have been sold.
 Analyzing Mixed Costs

There are ways to estimate how much of a mixed cost is variable and
how much is fixed. Two approaches are:

1. High-Low method

2. Linear regression
 An Example
Big Piney Resort has had great difficulty in predicting its costs at various levels of activity.
The reason is that the company has never attempted to study its cost sructure by analyzing
cost behavior patterns. The president has now become convinced that such an analysis is
necessary if the company is to maintain its profits and its competitive position. Accordingly,
an analysis of cost behavior patterns has been undertaken.

The company has managed to identify variable and fixed costs in all areas of its
operation except for food services. Costs in this area do not seem to exhibit either a
strictly variable or a strictly fixed pattern. Food costs over the past several months,
along with the number of meals served, are given below:

meals food
Month served cost
January 4,000 $18,000
February 5,000 $21,000
March 6,000 $24,000
April 10,000 $33,000
May 12,000 $35,000
June 11,000 $33,000
July 9,000 $30,000
August 8,000 $27,000
September 7,000 $26,000

Analyze the data above to determine the fixed and variable nature of the costs.
 High-Low Method
• First determine variable cost per unit:
 High-Low Method
• Second determine fixed cost

Total cost at high activity level minus total variable cost at high activity level
 High-Low Method
• Second determine fixed cost, you can also use low activity levels

Total cost at low activity level minus total variable cost at low activity level
 High-Low Method
• What will be estimated food cost if 9,200 meals are served?

Fixed cost

Variable cost

Total estimated food cost:

High-Low Method, Last Thing!
• The High-Low method is easy, but it has one BIG problem.

• It ignores all of the data between the high and low-points!!!

• Accuracy is an issue