Question

Please answer the following question and any explanation necessary along with they formulas.

#5 Define Variable, Fixed and Mixed Costs. Provide an example of each and describe how their graphs are drawn.

Answer 1

Answer:

Cost behavior refers to the relationship between total costs and activity level. Based on behavior, costs are categorized as either fixed, variable or mixed. Fixed costs are constant regardless of activity level, variable costs change proportionately with output and mixed costs are a combination of both.

Fixed Costs

Fixed costs are those which do not change with the level of activity within the relevant range. These costs will be incurred even if no units are produced. For example rent expense, straight-line depreciation expense, etc.

Fixed cost per unit decreases with increase in production. Following example explains this fact:

Total Fixed Cost	$30,000	$30,000	$30,000
÷ Units Produced	5,000	10,000	15,000
Fixed Cost per Unit	$6.00	$3.00	$2.00

Total Fixed Cost Fixed Cost per Unit Number of Units Produced Number of Units Produced

Variable Costs

Variable costs change in direct proportion to the level of production. This means that total variable cost increase when more units are produced and decreases when less units are produced. Average variable cost i.e. variable cost per unit is constant . For example

Total Variable Cost	$10,000	$20,000	$30,000
÷ Units Produced	5,000	10,000	15,000
Variable Cost per Unit	$2.00	$2.00	$2.00

Total Variable Cost Variable Cost per Unit Number of Units Produced Number of Units Produced

Mixed Costs

Mixed costs or semi-variable costs have properties of both fixed and variable costs due to the presence of both variable and fixed components in them. An example of mixed cost is telephone expense because it usually consists of a fixed component such as line rent and fixed subscription charges as well as variable cost charged per minute cost. Another mixed cost example is delivery cost which has a fixed component of depreciation cost of trucks and a variable component of fuel expense.

Since mixed cost figures are not useful in their raw form, therefore 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.

Mileage, mi Variable component $0 $1,750 $3,500 $5,250 $7,000 $8,750 $10,500 $12,250 $14,000 $15,750 $17,500 2.500 5,000 7,500 10.000 12,500 15.000 17,500 20,000 22,500 25.000 Fixed component $5,000 $5,000 $5,000 $5.000 $5.000 $5,000 $5.000 $5.000 $5,000 $5,000 $5.000 Total cost Per unit cost $5,000 $6,750 $2.70 $8,500 $1.70 $10,250 $1.37 $12,000 $1.20 $13,750 $15,500 $1,03 $17,250 $19,000 $0.95 $20,750 $0.92 $22,500 $0.90 $1.10 $0.99

Fixed component Total cost Variable component $ 25,000 $ 20,000 Ő $ 15,000 $ 10,000 $5,000 $0,000 + 0,000 5,000 10,000 20,000 25,000 30,000 15,000 Mileage, mi

The following table shows a comparison of different costs classifications based on behavior:

Category	Fixed Costs	Variable Costs	Mixed Costs
Total cost	Constant	Changes proportionately with output	Change with output but not proportionately
Cost per unit	Decreases with increase in output	Constant	Decreases with increase in output but less than the decrease in fixed cost per unit
Examples	Plant depreciation, property taxes	Fuel expense, wages, raw materials	Telecommunication costs, senior management salaries, transportation cost

Thank You.