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Types of Cost Behavior Patterns

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Summary of Variable and Fixed Cost Behavior

Cost In Total Per Unit

Variable Total variable cost is Variable cost per unit remains

proportional to the activity
level within the relevant range.
Fixed Total fixed cost remains the
same even when the activity
level changes within the
relevant range.
the same over wide ranges
of activity.
Fixed cost per unit goes
down as activity level goes up.
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Total Variable Cost Example

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Your total long distance telephone bill is

based on how many minutes you talk
(the more you talk, the higher the bill).
Total Long Distance
Telephone Bill

Minutes Talked
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Variable Cost Per Unit Example

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The cost per minute talked is constant

(for example, 10 cents per minute).

Telephone Charge
Per Minute

Minutes Talked
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Total Fixed Cost Example

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Your monthly basic telephone bill is

probably fixed and does not change
when you make more local calls.
Telephone Bill
Monthly Basic

Number of Local Calls

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Fixed Cost Per Unit Example

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The fixed cost per local call decreases

as more local calls are made.

Monthly Basic Telephone

Bill per Local Call
Number of Local Calls
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Fixed Costs and Relevant Range

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The company’s
normal operating range
90
Thousands of Dollars

Total cost doesn’t

change for a wide
Rent Cost in

Relevant
60 range of activity.
Range It then jumps to a
new higher cost
30 for the next higher
range of activity.

00 1,000 2,000 3,000

Rented Area (Square Feet)
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Fixed Costs and Page

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Step-Variable (or Step-Wise) Costs

How does this type of Step-variable

fixed cost differ from a (or step-wise) costs
step-variable (or step- can be adjusted
more quickly and . . .
wise) cost?
The width of the
activity steps is
much wider for the
fixed cost.
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Step-Variable (or Step-Wise) Costs

Total cost increases
to a new higher cost
for the next higher range
of activity.

Cost
Total cost
remains constant Activity
within a narrow
range of activity.
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Mixed Costs
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A mixed cost has both

fixed and variable components.

Consider the
following electric
utility example.
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Mixed Costs The total mixed cost line can Here

be expressed as an equation: Y = a + bX

Where: Y = the total mixed cost

a = the total fixed cost (the
vertical intercept of the line)
b = the variable cost per unit of
Y activity (the slope of the line)
X = the level of activity
Total Utility Cost

o st
d c
i xe Variable
t alm Utility Charge
To

Fixed Monthly
Utility Charge
X
Activity (Kilowatt Hours)
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The High-Low Method

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WiseCo recorded the following production activity and maintenance costs for two months:

Units Cost
High activity level 9,000 $ 9,700
Low activity level 5,000 6,100
Change 4,000 $ 3,600

To break down the mixed cost,

these two levels of activity are used to:
 compute the variable cost per unit;
 compute the fixed cost; and then
 express the costs in equation form Y = a + bX.
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The High-Low Method

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Units Cost
High activity level 9,000 $ 9,700
Low activity level 5,000 6,100
Change 4,000 $ 3,600

Changein cost
Unit variable cost = Change in units

Unit variable cost = $3,600 ÷ 4,000 units = $0.90/unit

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The High-Low Method

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Units Cost
High activity level 9,000 $ 9,700
Low activity level 5,000 6,100
Change 4,000 $ 3,600

Unit variable cost = $3,600 ÷ 4,000 units = $0.90/unit

Fixed cost = Total cost – Total variable cost

Fixed cost = $9,700 – ($0.90 per unit × 9,000 units)

Fixed cost = $9,700 – $8,100 = $1,600
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The High-Low Method

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Units Cost
High activity level 9,000 $ 9,700
Low activity level 5,000 6,100
Change 4,000 $ 3,600

Unit variable cost = $3,600 ÷ 4,000 units = $0.90/unit

Fixed cost = $9,700 – ($0.90 per unit × 9,000 units)
Fixed cost = $9,700 – $8,100 = $1,600
Total cost = Fixed Cost + Total variable cost
Y = a + bX
Y = $1,600 + $0.90X