[Q.40] What is cost behavior?

Cost behavior is associated with learning how costs change when there is a change in an organization’s level of activity. The costs which vary proportionately with the changes in the level of activity are referred to as variable costs. The costs that are unaffected by changes in the level of activity are classified as fixed costs.

Cost behavior is not required for external reporting under U.S. GAAP. However, the understanding of cost behavior is very important for management’s efforts to plan and control its organization’s costs. Budgets and variance reports are more effective when they reflect cost behavior patterns.

The understanding of cost behavior is also necessary for calculating a company’s break-even point and for any other cost-volume-profit analysis.

Posted in: accounting,costs,Q.31-40