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Activity Cost Behavior

Fixed costs remain constant as output changes, while variable costs change proportionally with output. Mixed costs have both fixed and variable components. To classify costs, the time horizon and resources/outputs must be considered. In the short run, at least one cost is fixed. Resources include direct materials, labor, and capital. Flexible resources like materials vary with output, while committed resources like labor contracts create fixed costs in the short run.

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MUTIA ADELIA MURKI
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124 views

Activity Cost Behavior

Fixed costs remain constant as output changes, while variable costs change proportionally with output. Mixed costs have both fixed and variable components. To classify costs, the time horizon and resources/outputs must be considered. In the short run, at least one cost is fixed. Resources include direct materials, labor, and capital. Flexible resources like materials vary with output, while committed resources like labor contracts create fixed costs in the short run.

Uploaded by

MUTIA ADELIA MURKI
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Activity Cost Behavior

The Basics of Cost Behavior


Cost behavior is the general term for describing whether costs change as output changes.
Costs react to output changes in many different ways. We will begin by looking at the
simplest possibilitiesfixed costs, variable costs, and mixed costs.

Fixed Cost
A cost that stays the same as output changes is a fixed cost. More formally, a fixed
cost is a cost that, in total, remains constant within a relevant range as the level of activity
output changes. Perlu diperhatikan bahwa jumlah biaya tetap tidak bergantung

pada ukuran keluaran. Meskipun jumlah biaya tetap tidak berubah saat keluaran

meningkat, biaya tetap per unit akan berubah karena biaya tetap disebar ke

lebih banyak keluaran.

Variable Cost
While fixed costs remain unchanged as output varies, variable costs do change as
output changes. A variable cost is a cost that, in total, varies in direct proportion to changes
in output. That is, a variable cost goes up as output goes up, and it goes down as output goes
down. Variable costs can also be represented by a linear equation. total variable cost depends
on the level of the driver. This relationship can be described by the following:

Total variable cost = Variable cost per unit x Number of units


Mixed Costs
A mixed cost is a cost that has both a fixed and a variable component. The linear
equation for a mixed cost is given by:
Total cost = Fixed cost + Total variable cost

Classifying Costs According to Behavior


To assess cost behavior, we must first consider the time horizon. Then, we must
identify the resources needed and the output of the activity. Finally, we must measure the
inputs and outputs and determine the impact of output changes on the activity cost.
Time Horizon Determining whether a cost is fixed or variable depends on the time horizon.
According to economics, in the long run, all costs are variable; in the short run, at least one
cost is fixed.
A process that takes materials and molds them into the shape of a garden hose. The output is
the number of feet of hose. As the amount of hose changes, the direct materials used are
relatively easy to adjust (acquiring more as the output increases and less as it decreases).
For direct labor. In some settings, a company may be able to hire and lay off its labor
relatively quicklyin which case labor could be treated as a variable cost. In other cases, a
company may not lay off labor for short-term drops in production.
The length of the short-run period depends to some extent on management judgment and the
purpose for which cost behavior is being estimated.
Resources and Output Measures Every activity needs resources to accomplish the task it
has to do. Resources might include materials, energy or fuel, labor, and capital. These inputs
are combined to produce an output.
Another term for output measure is driver. Activity drivers are observable causal factors that
measure the amount of resources a cost object uses. Activity drivers explain changes in
activity costs by measuring changes in activity use or output. Activity drivers are divided into
two general categories: production (or unitlevel) drivers and non-unit-level drivers.
Production drivers explain changes in cost as units produced change. Pounds of direct
materials, kilowatt-hours used to run production machinery, and direct labor hours are
examples of production drivers. In other words, as pounds of materials used, kilowatt-hours,
and direct labor hours increase, output also increases. Non-unitlevel drivers explain changes
in cost as factors other than units change. For example, setups are a non-unit-level activity.

Activities, Resource Usage, and Cost Behavior


Long-run and short-run cost behaviors are related to activities and the resources needed to
perform them. Capacity is simply the actual or potential ability to do something. So, when we
talk about capacity for an activity, we are describing the amount of the activity that the
company can perform.
Flexible Resources
It would be nice if a company could purchase only those resources it needed at precisely
the time the resources were needed. For example, direct materials are frequently purchased at
the time and in the amount needed. This kind of resource is called a flexible resource.
Flexiblen resources are supplied as used and needed. Materials and energy are examples.
There is no unused capacity for this category of resources, since the amount of resource used
just equals the amount purchased. Since the cost of the resources supplied as needed equals
the cost of resources used, the total cost of the resource increases as demand for the resource
increases. Thus, the cost of flexible resources is a variable cost.
Committed resources
Committed resources are resources that are supplied in advance of usage; they are acquired
by the use of either an explicit or implicit contract to obtain a given quantity of resource,
regardless of whether the amount of the resource available is fully used or not. Committed
resources may have unused capacity, since more may be available than is actually used. We
may call these shorter-term committed resources discretionary fixed costs. They are costs
incurred for the acquisition of short-term activity capacity.

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