Posted in Finance, Accounting and Economics Terms, Total Reads: 735
Definition: Cost by Behavior
Costs by behavior is the way the different types of costs behave with the changes in the production activity. In other words, it is the change in the different types of production costs with the changing levels of production. We can divide the costs as fixed costs and variable costs. Variable costs change proportionally with the production activity. Fixed costs remain unaffected with the changes in the levels of production. Examples of fixed costs are rent, electricity, etc whereas that of fixed costs are labour, material, etc. Costs by behaviour help to forecast the budget.
Example – Consider that one unit of a product X requires material worth Rs 10. The labor cost is Rs 20 per labor per day. Assume that 20 units of X can be produced in a day. Let the rent expense be Rs 100.
If 5 units are produced in a day, then the variable cost would be 5 * (10 + 20) = Rs 150 and fixed cost would be Rs 100 only.
If 20 units are produced in a day, the variable cost = 20 * (10 + 20) = Rs 600