1. Identifying Cost Behavior
Chapter 4
Managerial Accounting
Identifying Cost Behavior
Prepared by Diane Tanner
University of North Florida
Copyright ©2015. University of North Florida. All rights reserved.

2. To predict cost behavior, we must assume
Assumptions 2
To predict cost behavior, we must assume
Production equals sales (in units)
I.e., no change in beginning and ending inventories
Cost behavior is linear
Activity level occurs within a defined activity range
Called relevant range

3. 3
Relevant Range
A range of activity within which cost behavior holds true
I. e., Normal range of operations that can be expected for a particular product or company
Activity outside of this range, forecasts of cost behavior may not be accurate
Cost
Relevant range
Units

4. Variable Cost Behavior4
Total Variable Cost
Unit Variable Cost
Total Costs
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
Units Produced (000)
Cost per Unit
$20
$15
$10 $5
Units Produced (000)
Total Variable Costs
Change as volume or activity level changes
Unit Variable Costs
Same cost per unit at any activity level

5. Fixed Cost Behavior Total Fixed Cost Unit Fixed Cost Total Fixed Costs5
Total Fixed Cost
Unit Fixed Cost
Total Costs
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
Units Produced (000)
$20
$15
$10 $5
Cost per Unit
Units Produced (000)
Total Fixed Costs
Same cost at any activity level
Unit Fixed Costs
Change per unit as volume or activity levels change

6. Discretionary vs. Committed Fixed Costs6
Discretionary vs. Committed Fixed Costs
Describes behavior of fixed costs in the short-run
Discretionary
Can easily change in the short run
Examples:
Advertising
R&D
Repair and maintenance
Committed
Not easily changed in the short run
Rent
Depreciation – buildings and equipment
Insurance for buildings and equipment

7. 7
Step Costs
Costs that remain constant within a short relevant range of activity, then adjust to a new level
Example: Cleaning services at UNF
0-40 classrooms
41-80 classrooms
1 Janitor
2 Janitors
$22,000
$44,000
classrooms
3 Janitors
$66,000
Volume
Cost

8. 1- Flat monthly charge plus added costs for excess data usage
Mixed Costs 8
Consist of both a variable cost element and a fixed cost element
Often referred to as semi-variable costs
Characteristics
Costs change in total but not proportionately with changes in the activity level
Example: Cell phone
1- Flat monthly charge plus added costs for excess data usage
Fixed cost portion
Total cost
Number of megabytes over
Cost
Variable cost portion

9. Determining Cost Behavior
Two-step process
Step 1 - Test to determine if the cost is fixed:
Compare the total cost at all activity levels.
A fixed cost is the same in total at all activity levels.
If the fixed cost test fails, move to step 2.
If the fixed cost test passes, the cost is fixed.
Step 2 - Test to determine if the cost is variable:
Compare the unit cost at all activity levels.
A unit variable cost is the same at all activity levels.
If the variable cost test fails, the cost is a mixed cost.
If the variable cost test passes, the cost is variable.

10. The End