Cost behaviors

Definition

Cost behaviors describe how costs change in relation to changes in a company's level of activity. These behaviors are essential for budgeting, forecasting, and decision-making processes.

5 Must Know Facts For Your Next Test

1. Fixed costs remain constant regardless of activity level within the relevant range.
2. Variable costs change directly in proportion to changes in activity levels.
3. Mixed costs contain both fixed and variable components, changing with activity levels but not proportionally.
4. Understanding cost behavior is crucial for break-even analysis and determining contribution margins.
5. Cost behavior patterns help managers make informed decisions about pricing, production planning, and resource allocation.

Review Questions

• What happens to fixed costs as the level of activity increases or decreases?
• How do mixed costs behave differently from purely variable or fixed costs?
• Why is understanding cost behavior important for managerial decision-making?

Related terms

Fixed Costs: Costs that remain constant within a certain range of activity.

Variable Costs: Costs that vary directly with the level of production or sales volume.

Break-Even Analysis: A calculation to determine the sales volume at which total revenues equal total costs, resulting in no profit or loss.