Definition of Cost Behavior
Cost behavior is an indicator of how a cost will change in total when there is a change in some activity. In cost accounting and managerial accounting, three types of cost behavior are usually discussed:
- Variable costs. The total amount of a variable cost increases in proportion to the increase in an activity. The total amount of a variable cost will also decrease in proportion to the decrease in an activity.
- Fixed costs. The total amount of a fixed cost will not change when an activity increases or decreases.
- Mixed or semivariable costs. These costs are partially fixed and partially variable.
Understanding how costs behave is important for management's planning and controlling of its organization's costs, and for cost-volume-profit analyses (including the calculation of a company's break-even point).
Examples of Cost Behavior
An example of a variable cost is the cost of flour for a bakery that produces artisan breads. The greater the number of loaves produced, the greater the total cost of the flour used by the bakery.
An example of a fixed cost is the depreciation and insurance on the bakery facility and equipment. Regardless of the quantity of artisan breads produced in a month, the total amount of depreciation and insurance cost for the month will remain the same.
An example of a mixed cost or semivariable cost is the bakery's cost of natural gas. Some of the monthly gas bill is a flat fee charged by the utility and some of the gas bill is the cost of heating the building. These two components of the gas bill are fixed since they will not change when the bakery produces more or less loaves of its bread. However, a third component of the gas bill is the cost of operating the ovens. This component is a variable cost since it will increase when the ovens must operate for a longer time in order to produce additional loaves of bread.