CHAPTER 3 – COST BEHAVIOUR
1. Explain the meaning of cost behaviour, and define and describe fixed and variable costs.
Cost behaviour is the way a cost changes in relation to changes in activity output
Time horizon is important because costs can change from fixed to variable depending on
whether the decision takes place over the short run or the long run
Variable costs change in total as the driver, or output measure, changes. Usually, we
assume that variable costs increase in direct proportion to increases in activity output
Fixed costs do not change in total as activity output changes
2. Define and describe mixed and step costs.
Mixed costs have both a variable and a fixed component
Step costs remain at a constant level of cost for a range of output and then jump to a
higher level of cost at some point, where it remains for a similar range of output.
Cost objectives that display a step cost behaviour must be purchased in chunks
The width of the step defines the range of output for which a particular amount of the
3. Separate mixed costs into their fixed and variable components using the high-low method, the
scatter graph method, and the method of least squares.
In the high-low method, only two data points are used – the high point and the low