Budgeting Basics and Beyond

7.1. A Look at Costs by Behavior

Depending on how a cost will react or respond to changes in the level of activity, costs may be viewed as variable, fixed, or mixed (semivarible). This classification is made within a specified range of activity, called the relevant range. The relevant range is the volume zone within which the behavior of variable costs, fixed costs, and selling prices can be predicted with reasonable accuracy.

Variable Costs

Variable costs vary in total with changes in volume or level of activity. Examples of variable costs include the costs of direct materials, direct labor, and sales commissions. These factory overhead items fall into the variable cost category:

Variable Factory Overhead
Supplies	Receiving costs
Fuel and power	Overtime premium
Spoilage and defective work

Fixed Costs

Fixed costs do not change in total regardless of the volume or level of activity. Examples include advertising expense, salaries, and depreciation. These factory overhead items fall in the fixed cost category:

Fixed Factory Overhead
Property taxes	Rent on factory building
Depreciation	Indirect labor
Insurance	Patent amortization

Mixed (Semivariable) Costs

Mixed costs contain both a fixed element and a variable one. Salespersons' compensation, including salary and commission, is an example. These factory overhead items may be considered mixed costs:

Mixed Factory Overhead
Supervision	Maintenance and repairs
Inspection	Compensation insurance
Service department costs	Employer's payroll taxes
Utilities ...