Question

Identify common cost behavior patterns, and please discuss the relation between cost and activity using account analysis and the high-low method

Managerial Accounting and Control Systems, Chapter 4

Answer 1

Patterns of Costs by Behavior​​​​​​

Cost behavior is the relationship between total costs and level of activity.

Based on behavior, costs are categorized as either fixed, variable and mixed or Semi Variable.

Fixed Costs

Fixed costs are those which remains constant irrespective of the level of activity.These costs will be incurred even if no units are produced. These are not Product Cost. For example rent expense.

Variable Costs

Variable costs is the cost which changes in direct proportion to the level of output or production.The  total variable cost has a increase when more units are produced vise versa.

Mixed Costs or Semi Variable Cost

Mixed costs or semi-variable costs have  the presence of both variable and fixed components in them. An example of mixed cost is telephone expense because it has a fixed subscription charges as well as variable cost charged per minute cost.

Since mixed cost figures are not useful in their Original form, they are split into their fixed and variable components by using cost behavior analysis techniques such as High-Low Method, Scatter Graph Method and Regression Analysis.

High Low Method is a mathematical techniques used in Cost Volume analysis which provides an easy way to split fixed and variable components of combined costs using the following formula :

Variable Cost Per Unit	=	Highest Activity Cost - Lowest Activity Cost
		Highest Activity Units - Lowest Activity Units

Once variable cost per unit is found, you can calculate the fixed cost by subtracting the total variable cost at a specific activity level from the total cost of that activity level.

Fixed Cost   =   Highest Activity Cost - (Variable Cost Per Unit x Highest Activity Units) same for lowest activity unit and cost