Cost Behavior
Illustration 9-3 shows how the variable cost for DVD cases behaves on the per-unit bases as production changes.
Note that the unit cost line starts at $1 point and stays constant with the increase in the number of units purchased.
Illustration 9-3: Unit variable cost graph
We have reviewed variable cost graphs. Before moving on to the next point let us give more examples of variable costs. Illustration 9-4 below provides examples of variable costs along with their cost drivers for various types of businesses.
Illustration 9-4: Examples of variable costs
Type of Business |
Cost |
Cost Driver |
Manufacturing |
Direct Materials |
Number of units produced |
Restaurant |
Payroll |
Number of hours |
Taxi |
Fuel |
Number of miles driven |
Hotel |
Housekeeping costs |
Number of rooms occupied |
Print house |
Paper |
Number of printed out pages |
Hospital |
Food cost |
Number of patients |
9.4 Fixed costs
Unlike variable costs, total fixed costs remain the same as the level of activity (cost driver) changes.
However, fixed costs per unit usually change with changes in the activity base. Insurance costs, rent costs, salaries of accounting department are typical examples of fixed costs.
For example, Friends Corporation pays $5,000 per year for property insurance. It is a fixed cost that does not vary with the number of produced DVDs. Although the total fixed cost remains the same as the number of DVDs produced change, the fixed cost per DVD changes. The more DVDs are produced, the less the fixed cost per unit is. Illustration 1.5 shows this relationship.
Illustration 9-5: Fixed cost of property insurance at different production levels
Number of DVDs Produced |
Total for Property Insurance |
Property Insurance per DVD Produced |
100,000 |
$5,000 |
$0.05 |
200,000 |
$5,000 |
$0.025 |
300,000 |
$5,000 |
$0.0167 |
400,000 |
$5,000 |
$0.0125 |
500,000 |
$5,000 |
$0.01 |
The data from the table above can also be presented in the form of a graph. Illustration 9-6 demonstrates how the property insurance cost behaves as total production changes.
Illustration 9-6: Total fixed cost graph
Note that the property insurance cost line starts at $5,000 point and does not change with the increase in the number of units produced.
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