Question

What do managerial accountants mean when they speak of cost behavior? Why is it important in managerial decision making?

Answer 1

Cost behavior refers to the way different types of production costs change when there is a change in level of production.

There are three main types of costs according to their behavior:

Fixed Costs:

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

Fixed cost per unit decreases with increase in production.

Variable Costs:

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. Although variable in total, these costs are constant per unit.

Mixed Costs:

Mixed costs or semi-variable costs have properties of both fixed and variable costs due to presence of both variable and fixed components in them.

Importance of cost benefit analysis-
(a) Cost behavior analysis is the study of how specific costs respond to changes in the level of activity within a company.
(b) Cost behavior analysis is important to management in planning business operations and in deciding between alternative courses of action.