Costs, as soon as categorized according to behavior (in relationship to transforms in level that activity), deserve to be classified into: (1) solved costs and (2) variable costs.

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Total variable expenses increase as variety of units (cost driver) increase. Variable costs per unit room constant.

Within a pertinent range, full fixed costs are continuous even if devices increase. Fixed expense per unit reduce as systems increase.

Mixed costs have aspects of both fixed and variable costs. For better analysis the costs, mixed costs are frequently segregated right into variable and also fixed.


Variable Costs

Within the relevant variety and mentioned time period, the full amount that variable expenses varies straight (in proportion) to readjust in activity level. The price per unit is constant.000

For example: ABC company spends $2.50 materials expense for every unit of Product A. If the company produces 1,000 units, the spends $2,500 ($2.50 x 1,000). If that produces 2,000 units, then the firm will invest $5,000 ($2.50 x 2,000). Take note that the cost per unit go not change but the total cost varies directly with the level that activity.

Total variable expense = Variable expense per unit x number of units or activity

Common instances of variable costs include straight materials, straight labor, supplies, fuel and power, spoilage costs, receiving costs, royalties, overtime premium, sales commissions, and also delivery expenses.


Fixed Costs

Within the pertinent range, total fixed prices remain constant. Regardless of the level of activity, the business pays the same. However, the fixed expense per unit alters as the level of task changes. As more units space produced, the fixed expense per unit decreases.

For example: ABC agency pays monthly rent of $30,000 because that a factory building. Nevertheless of how plenty of units space produced, the firm pays the very same amount. If we are to compute because that the fixed price per unit in ~ 1,000 units, it would be same to $30 ($3,000/1,000 units). If the firm produces 1,500 units, climate fixed expense per unit would certainly be $20 ($3,000/1,500 units). As the level of task increases, the fixed expense per unit decreases. The total fixed price remains the same.

Examples of fixed expenses include rent, depreciation, patent amortization, building insurance, residential property taxes, and also fixed earnings of manufacturing executives and indirect labor.

Mixed Costs

Mixed costs contain both fixed and also variable elements. The company pays a consistent fixed cost and a variable amount on top of it. Examples of mixed expenses include: utilities, repairs and also maintenance, inspection, fringe benefits, employer's payroll taxes, and salaries the contain a resolved amount add to commissions.

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Total cost = Fixed costs + change costsTotal expense = FC + (VC every unit x number of units)

Example

XYZ firm has entered into several contracts that need it come pay fixed selling expenses of $100,000 per month. The cost accountant figured out the variable selling expense at $30 per unit. Compute because that the complete selling expense that would be incurred if the agency expects to market 2,500 units next month.

Solution:Total price = Fixed cost + change costsTotal expense = $100,000 + ($30 x 2,500)Total price = $175,000