Question

Cost behavior refers to:

A.Costs that are both good and bad.

B.Costs that are variable or fixed.

C.Costs that decrease at a quicker rate than others.

D.Costs that increase at a quicker rate than others.

E.None of these.

Answer 1

Cost behavior simply refers to the sensitivity of costs to changes in production or sales volume. Cost behavior is the manner in which expenses are impacted by changes in business activity. For example, if the usage of a production line is approaching its maximum capacity, the relevant cost behavior would be to expect a large cost increase (to pay for an equipment expansion) if the incremental demand level increases by a small additional amount.

The general types of cost behavior fall into three categories:

1. Variable Costs

2. Fixed Costs

3. Mixed Costs

Variable costs are such costs that change with the change in units of production. However, the rate per unit of resource are fixed. These costs are directly proportional to change in volume of production or sales. For Example, Direct Material, Direct Labour, Raw materials,etc. Fixed Costs are such costs which occur irrespective to any change in volume of production or sales. For example, rent of premises, employee salaries, etc.. Apparently Fixed Costs do not have any behaviour towards any change in production or sales volume, except when they end completely. Mixed Costs are simply such costs that have both fixed and variable components of cost.

Thus, to summarise Cost behaviour simply refers to whether costs are Variable or Fixed.

Therefore, Correct Option is Option B (Costs that are variable or fixed)