Cost Behavior
9.3 Variable costs
Variable cost changes in direct proportion to changes in the level of activity (cost driver).
Direct materials and direct labor costs are generally classified as variable costs. Variable costs are the same per unit, while the total variable costs changes in proportion to the changes in the cost driver (activity base).
Let us return to our example with production of DVDs. Each DVD will be packed into a DVD case. DVD cases are purchased from outside suppliers for $1 per unit. Friends Corporation produces DVDs in the range of 100,000 to 500,000 units per year.
Illustration 9-1 shows DVD case costs for the whole range.
Illustration 9-1: Variable cost of DVD cases at different production levels
Number of DVDs Produced |
Cost of One DVD case |
Total Cost of DVD cases |
100,000 |
$1.00 |
$100,000 |
200,000 |
$1.00 |
$200,000 |
300,000 |
$1.00 |
$300,000 |
400,000 |
$1.00 |
$400,000 |
500,000 |
$1.00 |
$500,000 |
The total cost of DVD cases varies in direct proportion to the number of units produced. The unit cost, however, is the same and does not depend on the output volume.
The variable costs from the table above can be easily presented in the form of a graph. Illustration 9-2 demonstrates how the variable costs for DVD cases behave as total production changes.
Note that the variable cost line starts at zero cost for zero production and increases gradually with the increase in the number of DVDs produced.
Illustration 9-2: Total variable cost graph
Page 2 of 7
Location