1. AMIS 310 Foundations of Accounting
Chapter 12 Module 2
CHAPTER 1 MODULE 1
AMIS 310 Foundations of Accounting
Professor Marc Smith

2. Chapter 12 Module 2: Cost Behaviors
Cost behavior is a term used to describe how costs
change (react) to changes in the volume of activity
(very useful in management decision-making)
3 ‘Types’ of Costs in Cost Behavior Analysis
1) Variable Costs
2) Fixed Costs
3) Mixed Costs

3. Chapter 12 Module 2: Variable Costs
● Variable costs IN TOTAL change in
direct proportion to changes in the
volume of activity
● Variable costs PER UNIT are constant
meaning they do NOT change when
the volume of activity changes
● Examples of variable costs include
direct (raw) materials and direct labor

4. Chapter 12 Module 2: Variable Costs
A 3½-inch disk drive is added to each computer at a cost of $30 per computer. The total cost of disk drives for various levels of production is a follows:
Number of Computers Produced
Unit Cost of Disk Drives
Total Cost of Disk Drives
10 $ $300
,000
1, ,000
10, ,000

5. Chapter 12 Module 2: Fixed Costs
● Fixed costs IN TOTAL are constant meaning
they do NOT change when the volume of
activity changes
● Fixed costs PER UNIT change inversely with
changes in the volume of activity (as the
volume of activity increases, fixed costs per
unit decrease)
● Examples of costs that are typically fixed costs
include depreciation, rent, and advertising

6. Chapter 12 Module 2: Fixed Costs
The rent on the building where you produce computers is $1,000 per month.
Number of Computers Produced
Rent Cost per Computer
Total Cost of Rent
1 $1, $1,000
,000
,000
1, ,000

7. Chapter 12 Module 2: Mixed Costs
● Mixed costs are costs that contain both
a variable and a fixed element
● Because mixed costs have both variable
and fixed components neither the total
cost nor the unit cost is constant
● Examples of costs that are typically
mixed costs include utilities and overhead

8. Chapter 12 Module 2: Cost Behaviors
COST BEHAVIOR ASSUMPTIONS:
1) The cost behaviors we have just
discussed are assumed to exist
over a relevant range
Relevant range can be defined as
the range of activity within which
the assumptions made about cost
behaviors by managers are valid
2) The cost behavior patterns we have
discussed are assumed to be linear
within the relevant range (the cost
behavior pattern will plot as a straight
line within the relevant range)

9. Chapter 12 Module 2: Cost Behaviors
Reminder: Mixed costs are costs that have both a
variable and a fixed element. Thus, a
mixed cost does not have a constant
component.