Question

Definition and cost behavior: variable cost, fixed cost, mixed cost and be able to identify

Answer 1

First we discuss about all the definitions

Variable costs :- a cost which varies with the level of output. Examples. Raw material, production overheads.

Fixed cost :- bussiness costs that are fixed and does not have any variations with the vary of output

Example. Rent

Mixed cost :- these are the cost which are fixed till some extent and if that crosses the fixed extent it will vary with taking basis of the other factor.

Examples :- electricity expenses, telephone expenses.

Behaviour of the costs

Variable costs:-

1. These will vary on the basis of extent of the output.

2. This shows the effect on the cost of production.

3. This can be increased and decreased by the decisions of the management.

4. These are controllable costs.

Fixed cost :-

1. These costs shows no effect on the cost of production

2. This will be definitely in the price of the product.

3. These are not decided by management .

4. These are uncontrollable costs.

Mixed costs :-

1. These are uncontrollable till some extent after it minimum point it will become controllable costs.

2. It will be discuss with example of power expense.

3. We will use the power definitely and it was fixed for every month. But if we install nee plant and machinery to raise our production the consumption of power increases.

4. Here normal usage of power is fixed cost and usage of power to machinery is variable costs . Here we can use machinery at our discretion and raise the expenses with usage.

5. So the mixed cost is fixed for some extent and it will become vary with usage of other assets or increase in production.

These are all the definition and behaviours of the above three types of costs.

I hope, all the above mentioned points is helpful to you.

Thank you.