Question

What is meant by the term cost behavior?

Answer 1

The term cost behaviour is understanding the how cost is change when there is a change in an organization level of activity.Cost behviour is study to understand the nature of cost in relation to activity level of production.it shows how the cost changes due to change in level of activity .According to behaviour we can classify the cost behaviour in two parts.

1 Fixed cost

2.Variable cost.

Fixed cost:- Fixed cost are commonly described as those cost which remain fixed in total amount with increase or decrease in the volume of output of productive activity for a given period of time .Fixed cost per unit decrease as production increases and increases as production declines . Examples for fixed cost are rent, insurance of factory building , These fixed cost are constant in total amount but fluctuate per unit as production changes . We can say rent of factory will remain same per year irrespective of production.

Variable cost:-These are cost which vary in total in direct proportion to the volume of output . These cost per unit remain relatively costant with changes in production . Thus , variable cost fluctuate in total amount but tend to remain costant per unit as production activity changes . Examples are direct labour cost, direct material cost , power , repairs etc. These cost are known as product cost.

Cost behavior is not required for external reporting under U.S GAAP . However the understanding of cost behaviour is very important fo management efforts to plan and controls its organization cost.The understanding of cost behaviour is also neccessary for calculating the company break even point and for any other cost volume profit analysis.