CLASSIFICATION OF COSTS BY
BEHAVIOUR
Classifying
costs by behaviour requires you to classify the costs into-
-Variable costs
-Fixed costs
-Semi-variable
costs
-Stepped costs
Variable costs- these are costs that vary with the
level of production or activity. It is usually assumed to vary in direct
proportion to production. For example, if you make twice the number of chairs
then the assumption is that the amount of wood used would be doubled.
Fixed costs- these are costs that are not affected
by changes in the level of production or activity, hence costs that don’t vary.
For example, rent costs for a factory. It is assumed that if production
increases, the factory rent cost would not be increasing based on the
production volume.
Semi-variable costs- these are costs that have a fixed
element and a variable element. This means that if production were to double,
the cost of production will not double because of the fixed cost element in the
production cost, which will remain the same. For example, the cost of
electricity for the factory has a fixed element relating to lighting and a
variable element relating to power used in the production line.
Stepped costs- these are costs that remain fixed up to
a particular level of activity, but which rise to a higher (fixed) level, if
activity goes beyond that range. For example, a firm may pay £40,000 per year
to rent a factory in which they can produce up to 1 million units of product
per year. However, if demand increases to more than 1 million units, a second
factory may be required, in which case the cost if factory rent may step up to,
say, £80,000 per year and then be constant until we want to make more than 2
million units.