Determining How Costs Behave Research Paper Example | Topics and Well Written Essays - 500 words

Determining How Costs Behave - Research Paper Example The purpose of this assignment is to study the behavior of fixed, variable and total cost at different level of business activities. The behavior of cost is related to the level of business activity (â€Å"Identifying Cost Behavior†, n.d.). It implies that a change in business activity exerts influence on the parameters of the above equation. This reaction of it is called cost behavior. Some costs may stay same, and others may change proportionally in response to a change in business activity. That is why; for managers of a company, it is necessary to understand how a cost reacts to a change in the business activity. This knowledge helps managers to determine future profit from a new product, prepare a forecast and create a budget (Horngren, Sunden, Schatzberg, & Burgstahler, 2012). From the perspective of cost behavior, there are three type of costs: fixed, variable, and mixed. Fixed are those costs that do not change due to the change of level of activity. However, fixed cost, if expressed per unit basis, varies inversely due to the change of level of activity (Caplan). Some of the examples of fixed costs are salaries, rent, and property taxes. Variable are those costs that change due to the change of level of activity. It is constant per unit. In linear equation, variable costs vary linearly with the change of level of activity. Variable costs, by definition, are considered as cost drivers (Horngren, Sunden, Schatzberg, & Burgstahler, 2012). Cost drivers also demonstrate cause and effect relationship between the level of an activity and costs related to that activity (â€Å"Types of Cost Behavior†, n.d.). Some of the examples of variable costs are direct material, direct labor, and sales commission. Mixed are those costs that have both fixed and varia ble components. The discussion above can be expressed as Total cost = Total fixed cost + Total variable cost. From this equation, we can