How is cost behavior used by organizations for analysis?

Cost behavior analysis refers to management’s attempt to understand how operating costs change in relation to a change in an organization’s level of activity. These costs may include direct materials, direct labor, and overhead costs that are incurred from developing a product.

What is an example of cost behavior?

For example, if the usage of a production line is approaching its maximum capacity, the relevant cost behavior would be to expect a large cost increase (to pay for an equipment expansion) if the incremental demand level increases by a small additional amount.

What are the four types of cost behavior?

There are four basic cost behavior patterns: fixed, variable, mixed (semivariable), and step which graphically would appear as below. The relevant range is the range of production or sales volume over which the assumptions about cost behavior are valid. Often, we describe them as time-related costs.

What are the methods of analyzing cost behavior?

Answer: Four common approaches are used to estimate fixed and variable costs:

• Account analysis.
• High-low method.
• Scattergraph method.
• Regression analysis.