3. Cost:
• Is a value of money that has to be spent to produce,
obtain or purchase something.
• In Business Cost is valuation of:
• Efforts
• Material
• Resources
• Time etc.…
4. Division of Cost by its Behavior
• Basically the Cost of production has two
behaviors.
– Fixed Cost
– Variable Cost
5. Fixed Cost
• It is a cost which tends to be constant by increases or
decreases in the activity level.
• For Example:
– Salary of the production manager (monthly/annual)
– Insurance premium of factory work shop
– Depreciation on straight line method
6.
7. Variable Cost:
• A variable cost is a cost which tends to very directly with the
change in activity level. The variable cost per unit is the same
amount for each unit produced whereas total variable cost
increases as volume of output increases.
• Examples include:
– Cost of raw-material consumed
– Direct labor cost
– Selling commission
8. This graph shows a proportionate increase in the
cost by the increase in the activity level.
9. Cost Classifications for Predicting
Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
11. Difference Between Fixed Cost & Variable Cost
Fixed Cost
• Fixed Cost is the cost which
does not vary with the
changes in the quantity of
production units
• The Fixed cost is time-
related, i.e. it remains
constant over a period.
Variable Cost
• Variable Cost is the cost
which varies with the
changes in the number of
production units.
• Variable Cost which is
volume related, i.e. it
changes with the change in
volume.
12. Difference Between Fixed Cost & Variable Cost
Fixed Cost
• Fixed Cost is definite; it will
incur even when there is no
units are produced.
• Fixed cost changes in per
unit.
Variable Cost
• Variable Cost is not definite;
it will incur only when the
enterprise does some
production.
• variable cost remains
constant in per unit.
13. Difference Between Fixed Cost & Variable Cost
Fixed Cost
5. Examples of fixed cost are
rent, tax, salary,
depreciation, fees, duties,
insurance, etc.
Variable Cost
• Examples of variable cost
are packing expenses,
freight, material consumed,
wages, etc.
15. Example For Variable Cost
• For example: ABC Company spends $2.50 materials
cost for every unit of Product A. If the company
produces 1,000 units, it spends $2,500 ($2.50 x
1,000). If it produces 2,000 units, then the company
will spend $5,000 ($2.50 x 2,000).
• Take note that the cost per unit does not change but
the total cost varies directly with the level of activity.
• Total variable cost = Variable cost per unit x Number
of units or activity
16. Example For Fixed Cost
• For example: ABC Company pays monthly rent of
$30,000 for a factory building. Regardless of how many
units are produced, the company pays the same amount. If
we are to compute for the fixed cost per unit at 1,000
units, it would be equal to $30 ($3,000/1,000 units). If the
company produces 1,500 units, then fixed cost per unit
would be $20 ($3,000/1,500 units).
• As the level of activity increases, the fixed cost per unit
decreases.
• The total fixed cost remains the same
18. Example For total Cost
• XYZ Company has entered into several contracts that
require it to pay fixed selling costs of $100,000 per
month. The cost accountant determined the variable
selling cost at $30 per unit.
• Compute for the total selling cost that would be incurred
if the company expects to sell 2,500 units next month.
• Solution:
– Total cost = Fixed cost + Variable costs
– Total cost = $100,000 + ($30 x 2,500)
– Total cost = $175,000
19. Find using above examples
• Total Cost Per unit= Total Cost ÷ Units Produced
• Fixed Cost Per Unit= Total Fixed cost ÷ Units produced
• Variable Cost Per Unit= total variable cost ÷ Units produced
• Total Cost per unit= 175,000/2500
• Total Cost per unit= &70
• Fixed cost per unit=100,000/2500
• Fixed cost per unit= $40
• Variable cost per unit= $30 as defined in example
