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Identifying cost behaviour

How do you identify them the different types of cost, just by looking at the numbers? Watch this video to learn more about cost behaviour.

It’s all very well being able to recognise the different types of cost by looking at a graph – but how do you identify them in real life, just from looking at the numbers?

Actually, it’s fairly straightforward, as the Kaplan tutor explains in this video.

  • If the total of a cost doesn’t change as production levels change, then that cost can immediately be classified as a fixed cost.

But what if the total cost does change with production levels? That suggests it’s going to be either a variable cost or a semi-variable cost – but which?

To find out, calculate the cost per unit: total cost / number of units produced.

  • If the cost per unit stays the same despite production levels changing, then it is a variable cost.
  • If the cost per unit changes when production levels change, then it is a semi-variable cost.

The video has an example of calculating these – and also explains how to work out how much of a semi-variable cost is fixed and how much of it is variable.

It’s really important to have a good understanding of costs before we move on, so the next step seems like a good time for a quiz!

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Introduction to Business Budgeting

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