Question

Define the following costs terms and explain their behavior in relation to production on a per unit and total basis and give a specific example for each one.

1. Variable cost

2. Fixed cost

3. Mixed cost

Help me ~~

Answer 1

Answer-Variable Cost:-

Variable costs change in direct proportion to the level of production. This means that total variable cost increase when more units are produced and decreases when less units are produced. Average variable cost i.e. variable cost per unit is constant . For example

Total Variable Cost	$10,000	$20,000	$30,000
÷ Units Produced	5,000	10,000	15,000
Variable Cost per Unit	$2.00	$2.00	$2.00

Fixed Cost:-

Fixed costs are those which do not change with the level of activity within the relevant range. These costs will be incurred even if no units are produced. For example rent expense, straight-line depreciation expense, etc.

Fixed cost per unit decreases with increase in production. Following example explains this fact:

Total Fixed Cost	$30,000	$30,000	$30,000
÷ Units Produced	5,000	10,000	15,000
Fixed Cost per Unit	$6.00	$3.00	$2.00

Mixed Cost:-

Mixed costs or semi-variable costs have properties of both fixed and variable costs due to the presence of both variable and fixed components in them. An example of mixed cost is telephone expense because it usually consists of a fixed component such as line rent and fixed subscription charges as well as variable cost charged per minute cost. Another mixed cost example is delivery cost which has a fixed component of depreciation cost of trucks and a variable component of fuel expense.

Since mixed cost figures are not useful in their raw form, therefore they are split into their fixed and variable components by using cost behavior analysis techniques such as High-Low Method, Scatter Graph Method and Regression Analysis.