As the level of business tasks changes, some costs adjust while others carry out not. The response of a cost to a adjust in business activity is recognized as cost behavior. Supervisors should be able to predict the actions of a particular cost in response to a change in particular business activity. For this purpose, costs are classified as variable, fixed and also mixed costs. This short article explains these three types of costs and also their response to company activities.
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A price that changes, in full dollar amount, through the adjust in the level of activity is called variable cost. A usual example that variable expense is direct materials cost. Consider the following example to understand just how variable cost behaves in a manufacturing company.
A mobile phone call manufacturing agency purchases speaker from another agency at a cost of $2 per speaker. The speak is a direct materials price for cell phone phone manufacturing company. One speaker is offered to finish a mobile phone. The total and per unit expense of speaker at various levels of task is given below:
Notice that the full cost that speakers rises as the mobile phones created are increased but per unit expense remains constant.
Other instances of variable price include lubricants, sales commission and also shipping expenses etc.
A D V E R T i S E M E N T
A cost that does not change, in total, v the change in task is dubbed fixed cost. A common example that fixed cost is rent. In over example, if mobile call manufacturing agency rents a building for its factory for $5,000 every month, it will have to pay $5,000 for every month also no mobile call is produced during the month. The habits of fixed price is presented in the following figure:
Total fixed expense does not adjust with the adjust in task but every unit addressed cost changes with the rise and also fall in the level that activity. There is an inverse relationship in between per unit fixed cost and activity. If manufacturing increases, every unit fixed cost decreases and also if production decreases, every unit fixed cost increases. To know this point, we can use the data indigenous the over example of mobile manufacturing company. Take into consideration the adhering to table:
Notice that average fixed price (computed in the critical column) decreases together the production of smart phones increases. The is an amazing property of solved cost.
Mixed or semi-variable cost:
A cost that has actually the characteristics of both variable and fixed price is referred to as mixed or semi-variable cost. Because that example, the rental charges of a machine might encompass $500 per month plus $5 every hour of use. The $500 per month is a resolved cost and $5 per hour is a variable cost. An additional example of combined or semi-variable cost is electricity bill. The electrical power bill can be divided into two parts – (1) a fixed line rent and (2) price of units of electrical energy consumed. The line rent continues to be fixed and also is not affected by the usage of electrical energy whereas the cost of systems consumed varies v the change in systems consumed.
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Three frequently used methods to divided a combined or semi-variable expense into that fixed and variable contents are high-low suggest method, scatter graph method and least squares regression method.