c) COSTS CLASSIFICATION ACCORDING TO THEIR
BEHAVIOUR
This classification of costs deals with the way costs react to
changes in some factors. The most important factors that cause some costs to
change are the level of activity and the time factor.
As it concerns the level of activity, generally costs are
incurred because of performing a particular activity, this activity may
consists of various processes among which a major one that is sometimes
regarded as the main cost driver. It is that one whose changes will result to
very significant changes in the level of costs. It becomes possible at that
point to relate the level of activity of that cost driver to the level of costs
and as such the behaviour of that cost will be linked to the cost driver.
Concerning the time factor, costs do not behave the same way
in the long run as in the short run. As time elapses, there may be changes in
the market conditions such as inputs costs, level of demand or production
procedures. Such changes in the market situation over time will lead to a need
to a new analysis of costs depending on the time span of the plans we are
making.
These two factors have led experts to classify costs as:
· Variable
· Fixed
· Semi-variable
· Semi-fixed
· Short-term variable
· Long-term variable
Variable costs
Lucey (1993) defines a variable cost as a cost that tends to
vary with the level of activity. Garrison and Noreen more precisely define it,
as a cost that varies in total in direct proportion to changes in the level of
activity. An important aspect of this definition is the fact that variable
costs vary in total, this is because on a per-unit basis the variable costs are
constant and it is only when the level of activity, which may be the output, or
the number of hours worked changes that the total variable cost also changes.
This explains why the variable cost is always expressed in relation to a
particular factor. The figure drawn below depicts that relationship between the
level of activity and the behaviour of variable cost.
Figure 2-3 The behaviour of total
variable cost
Total Cost
Level of activity
Figure 2-4 The behaviour of Unit variable
cost
Unit cost
Level of activity
Such descriptions of variable costs are only a linear
approximation of real-life situations. This is because, in real life, variable
costs are rarely completely linear; they may also be curvilinear. A
curvilinear variable cost is one which varies ion total in either «less
than» or « more than» proportionate variation with the level of
activity.
When an increase in the level of activity leads to a
«less than» proportionate increase in the level of costs, this cost
is referred to as concave curvilinear variable cost. The
opposite is a convex curvilinear variable cost. They are
illustrated in the graphics below.
Figure 2-5 Curvilinear concave variable cost
Level of activity
Figure 2-6 Curvilinear convex variable cost
Level of activity
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