Identifying 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!