Question

Briefly describe variable, fixed, mixed, and step costs, and indicate how the total cost function of each changes as activity increases within a time period. Give 3 examples of each type of cost (only one example of step costs

Answer 1

Variable costs change in total in direct proportion to changes in activity or can say changes in production units.

Fixed costs do not change in response to a change in activity or can say change in units. It remains fixed for the period and hence also said period cost.

Mixed costs (sometimes called semi-variable costs) contain both the fixed and a variable cost elements.

Step costs are constant within a narrow range of activity but shift to a higher level when activity exceeds the range.

The total cost function of most organizations has shifted in recent years toward more fixed costs and fewer variable costs, making it increasingly important for organizations to manage their fixed costs.

Examples: Variable Costs = Material , Labour and Overhead
Fixed Costs = Depreciation, Salaries, Rent etc.
Mixed Costs = Expense of operating an automobile, Machine Setup Cost, Utilities Cost
Step Cost = A company can make 1000 units of product in a 8 hrs shift. If the company recieves another order then it must add another shift, which requires additional cost of shift manager. The cost of shift manager is Step Cost.