Cost Behaviour
the variation in costs relative to the variation in an organisation’s activities.
Cost can be categorized by….
- the way they’re used in decision making
* the way they change activity/volume levels change
Variable Costs
costs that increase in proportion to the increase in activity/volume levels
Fixed Costs
costs that do not change as activity/volume levels change
Relevant Range
span of activity levels for which the cost behaviour patterns hold
Marginal cost / incremental cost
cost of producing 1 extra unit
Cost Function
TC = TFC + (VC x Q)
Cost Driver
- input / activity that causes change in total cost for a cost object
- provides a measure of activity that explains the cost object’s use of the indirect cost.
Criteria • cause and effect • benefits received • fairness or equity • ability to bear • behavioural factors.
Direct Costs
Have a cause-and-effect relationship with cost object
*cost vs. benefit analysis will assess the cost of tracing costs to cost objects vs. benefits of having more detailed info
Indirect Costs
for the benefit of many cost objects and cannot be easily related to any specific cost object
Whether a cost is classified as direct or indirect depends on the:
• specific cost object which is being analysed
• cost/benefit assessment of tracing the cost.
Cost Allocation
Allocation of indirect costs to specific cost objects
Cost Pool
grouping of similar individual costs on a departmental basis.
