Cost behaviour

As the video explains, one other way of grouping costs is by the way those costs are affected by the business’ activity level. Essentially, as the business produces more units, do those costs increase or stay the same?

Fixed costs are just that – fixed at one level. They are unaffected by output levels of the business. An example is the annual rent paid on a factory: the rent stays the same no matter how many units the business produces.

Stepped fixed costs are fixed up to a certain activity level, above which they “step up” a level. An example is having to open a new factory once production has reached a certain level, which would increase fixed costs.

Variable costs vary and are not fixed – as production increases, so do variable costs. An example is materials – the more units produced the more materials are used.

Semi-variable costs are fixed to a point and then variable. An example is a phone bill which has a standard cost each month but then increases if you use extra minutes or data.