Cost Behaviour with Change in Volume
Three different types of cost behavior can be visualized with changes in volume/level of activity. (i) Fixed costs, (ii) Variable costs, and (iii) Mixed costs.
The fixed costs are associated with inputs that do not fluctuate in response to changes in the total activity or output of the firm, within relevant range for a given budget period. They may also be called non-variable costs. They are normally fixed for a relevant range of volume but fluctuate beyond that range. Moreover, fixed costs are to be analysed in relation to a given period of time, they are subject to change over a period of time.
Fixed costs may be: (i) Committed and (ii) Discretionary. Fixed costs that are associated with the acquisition of capacity producing assets are known as the committed fixed costs. The identifying characteristic of a committed cost is that its occurrence as well as amount are predetermined and can be altered only by another major decision to reverse or amend the earlier commitment. Also known as managed costs, discretionary costs result from management decisions. They are incurred as well as reduced at the discretion of the management.
Each of the two types of fixed costs has a different implication for the budgetary process. Committed fixed costs can be budgeted on the basis of past commitment. Discretionary fixed cost, on the other hand, can be budgeted on the basis of inquiry from the derision makers/management.
The variable costs are costs that are assumed to fluctuate in direct proportion to production activity/sales activity/some other measure of volume within relevant range for a given budget period. The level of variable costs at any volume can he estimated easily if the relationship between costs and volume is shown.