1. Cost Behavior in Relation to Activity Levels
Cost behavior describes how an expense changes when business activity levels (production volume, units sold, or machine hours) change. Understanding these behaviors is critical for accurate budgeting and profit forecasting.
2. Core Behavioral Profiles
  • Fixed Costs: Costs that remain constant in total amount regardless of changes in production volume, within a relevant range of activity. However, fixed cost per unit decreases as production increases.
    • Examples: Monthly factory rent, insurance premiums, and factory manager salaries.

  • Variable Costs: Costs that change in direct proportion to changes in production volume. However, variable cost per unit remains constant.
    • Examples: Raw materials, production piece-rate wages, and sales commissions.

  • Semi-Variable (Mixed) Costs: Costs that contain both a fixed base charge and a variable usage charge.
    • Example: A utility bill with a flat monthly connection fee plus a variable rate per kilowatt-hour consumed.

 
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