Recognizing Cost Behavior, Its Nature And How To Calculate It

Cost behavior is part of cost accounting. Maybe you still don’t understand in detail the characteristics of cost behavior and even are confused about what the difference between expenses and costs is.

Therefore, the purpose of this cost behavior is useful for analyzing these costing activities, so that later it does not have a negative impact on company operations.

Of course, as a businessman, you will find out how the cost behavior changes in the company, especially for manufacturing. So this influence becomes important for making decisions, estimating future costs, and evaluating.

Cost behavior is a description of the company’s activities, where the activity shows an up and down activity in company’s operations. So when the costs incurred are too much than the activity, this will be a loss for the company in the future.

Cost behavior is a change in the volume of activity which is divided into three namely fixed costs, variable costs and semi-variable costs.

Understanding the Definition of Cost Behavior?

Basically, cost behavior is a relationship between total and changes in the volume of company activity. Usually this behavior has 3 types of changes in the volume of cost activities, such as fixed costs, variable costs, and semi-variable costs.

In planning and controlling these 3 types of cost behavior, fixed costs and variable costs are divided into two groups, namely:

1. Fixed costs are divided into two costs, namely Committed Fixed Costs and Discretionary Fixed Costs.

2. Variable costs are divided into two, namely Engineered Variable Costs and Discretionary Variable Costs.

What are the Types of Cost Behavior?

As in the previous discussion, the types of cost behavior are divided into 3 types, namely:

1. Fixed Cost Behavior (Fixed Cost)

Fixed costs are costs that have a fixed total amount even though there are changes in the volume of certain business activities. However, the fixed costs per unit will change due to changes in the volume of activity.

Usually the size of fixed costs will be influenced by cost behavior objectives that affect the company’s long term, technology, management strategies and methods. Therefore, these fixed costs are also divided into two types, namely:

a. Committed Fixed Costs

Committed fixed costs represent most of the fixed costs arising from ownership of plant, basic organization and equipment.

In the cost behavior of committed fixed costs, all fixed costs will be incurred and cannot be reduced, in order to maintain the company’s ability to meet cost behavior objectives on a long-term basis. For example the cost of depreciation, property taxes, rent, salaries, and insurance.

b. Discretionary Fixed Costs

Discretionary fixed costs are also usually called managed or programmed costs, namely costs that arise from decisions to provide budgets on a regular basis or usually annually. Where directly reflects the policy of top management, which relates to the maximum amount of fees.

This cost behavior can describe the optimum relationship either input or output costs, but can be measured through the volume of sales, products, or services. Examples of discretionary fixed costs include research and development costs, consultant fees, advertising costs, employee training program costs, sales promotion costs.

2. Variable Costing Behavior (Variable Costing)

The term variable costing or variable cost is a cost whose total amount can change, but is proportional to changes in the volume of company activities, such as the cost of raw materials. Thus, the types of variable costs are also divided into 2, namely:

a. Engineered Variable Costs

Engineered cost variable is a cost associated with a specific physical relationship to a measure of activity. Usually all variable costs are engineered costs, so these costs change according to input or output, for example the use of raw material costs.

b. Discretionary Variable Costs

The previous explanation has said that all variable costs are engineered costs, but some of these variable costs can also be said to be discretionary variable costs.

The existence of discretionary variable costs depends on the company’s management decisions, so that the policy between input and output costs has a close relationship. When the output costs change, the input costs also change. For example, the cost of advertising.

3. Semi Variable Cost

In semi-variable costs are costs that have both fixed and variable elements, where semi-variable costs in fixed costs can be said to be the minimum amount of costs to provide services. In addition, variable costs are influenced by changes in the volume of activity.

How to Define the Characteristics of a Cost Behavior Pattern?

There are 3 factors that influence in determining the nature of cost behavior and must be considered, as follows:

1. Choose a cost and investigate its behavior pattern, so that this cost is said to be a dependent variable and is represented by the symbol y.

2. Choosing the nature of the independent variable, can cause these costs to fluctuate. So the calculation function is stated as y = f(x).

3. Choose the relevant activities, where the independent and dependent variable costs are expressed in the applicable cost function where the cost formula is y = a + bx.

What is the Cost Behavior Method and How is It Calculated?

In the cost method, it can be seen that there are two approaches to cost behavior, namely:

1. Analytical approach

2. Historical approach

Following are the functions of the 3 historical approach methods, namely:

a. High and Low Point Method

In estimating the cost function, analyze these costs by means of the highest level of activity. Where this way compares the lowest activity level in the past. For this reason, this cost difference will be included in the variable cost.

• Sample Cost Behavior Problem – High and Low Point Method

The activities and costs for the repair and maintenance of ABCDEF,LLC in 2020 are presented in the following table data:

MonthRepair And Maintenance CostMachine Clock

So it can be seen that activity in November 2020 is the lowest level of activity, but in December 2020 activity is the highest.

In the number of machine hours in the repair and maintenance costs, also have these two levels of activity. By comparing and calculating the difference:

Number of Machine Hours8.0004.0004.000
Repair and Maintenance Cost$1.000.000$530.000$470.000

b. Guard Fee Method

This method uses the calculation of costs that must still be incurred, even though the company is temporarily closed, the product will be equal to zero.

• Example of Cost Behavior Problem – Cost Precautionary Method

For example, for the repair and maintenance rate of 8,000 machine hours per month, the costs incurred are $ 1,000,000. However, in the calculation, if the company does not produce, the repair costs will be $ 470,000 per month.

In determining variable and fixed costs can be calculated as follows:

Variable Costs = Repair and Maintenance Costs – Fixed Costs (Maintenance Costs)

Variable Cost = $ 1,000,000 – $ 470,000

Variable Cost = $ 530,000

Variable Cost per hour = $ 530,000 / 8000 hours = $ 66 per machine hour

c. Least Square Method

In this method, it is related through the cost to the volume of activity, where it is in the form of a straight line with the regression line equation y = a + bx. So that at y is the dependent variable whose changes are determined by changes in the variable x, namely the independent variable.

The estimation of the example of the cost behavior can be done by using the calculation of the estimated interval number. Where this calculation estimates the actual cost.

This is a complete explanation of how you can understand cost behavior. In understanding these costs, a businessman or accountant can estimate which potential changes in costs in the future.

Therefore, it is a good step in running your business, as well as having difficulty calculating business expenses or even if you cannot control finances and bookkeeping.

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