Cost Behaviour: Definition, Formula and Example

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Pratibha Devasenapathy | May-04-2020

Cost Behaviour - Definition

In any business setup, processes change overtime and the best way to overcome any unprecedented changes in the most appropriate way is to be well prepared in advance about the future outcomes. One such aspect which gets impacted with changes is cost behaviour.

Cost behaviour is an indicator of how a cost will change in total when there is a change in some activity. In cost accounting and managerial accounting, three types of cost behaviour are usually discussed:

  • Variable costs. The total amount of a variable cost increases in proportion to the increase in an activity. The total amount of a variable cost will also decrease in proportion to the decrease in an activity
  • Fixed costs. The total amount of a fixed cost will not change when an activity increases or decreases
  • Mixed or semi variable costs. These costs are partially fixed and partially variable

It is important to understanding how costs behave, especially for management's planning and controlling its organization's costs, and for cost-volume-profit analyses (including the calculation of a company's break-even point).

Formula

Variable Cost = Total variable cost/Units Produced

Fixed Cost = Total fixed cost/Units Produced

Examples of cost behaviour

  • Variable cost

An example of a variable cost is the cost of flour for a restaurant. The greater the number of chapatis produced, the greater the total cost of the flour used by the restaurant.

  • Fixed cost

An example of a fixed cost is the depreciation and insurance on the restaurant and equipment. Regardless of the quantity of chapatis produced in a month, the total amount of depreciation and insurance cost for the month will remain the same.

  • Mixed cost

An example of a mixed cost or semi variable cost is the restaurant's cost of natural gas. Some of the monthly gas bill is a flat fee charged by the utility and some of the gas bill is the cost of heating the building. These two components of the gas bill are fixed since they will not change when the restaurant produces more or less chapatis. However, a third component of the gas bill is the cost of operating the ovens. This component is a variable cost since it will increase when the ovens must operate for a longer time in order to produce additional chapatis.

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