Cost Behavior Explained: Fixed, Variable, Mixed & Step Costs

Understand cost behavior by separating total cost from cost per unit. Professor Farhat explains fixed, variable, mixed and step costs with numerical examples and graphs, then shows how product costs differ from period costs. You will also trace manufacturing costs through inventory, distinguish direct and indirect costs, and learn prime costs, conversion costs and sunk costs. This foundational lesson supports cost and managerial accounting students, CMA candidates and CPA BAR candidates. CHAPTERS 00:00 Cost accounting terms and lesson overview 00:42 Period costs versus product costs 01:40 Raw materials to work in process, finished goods and COGS 02:38 Inventory cost flow through T-accounts 03:46 Manufacturing and merchandising product costs 04:49 Factory versus administrative cost examples 06:40 Direct materials and direct labor 08:11 Indirect labor: supervisors, security and janitors 09:45 Indirect materials and manufacturing overhead 12:25 Prime costs versus conversion costs 13:31 Fixed costs and the relevant range 15:05 Why fixed cost per unit falls as output rises 16:37 Variable costs: total versus per unit 19:07 Mixed costs: fixed plus variable components 20:26 Step costs and capacity limits 22:02 Sunk costs and decision-making 22:29 Fixed and variable cost comparison table 24:09 Reading fixed, mixed and step-cost graphs 25:06 Review and study practice COST BEHAVIOR: TOTAL VS. PER UNIT Within the relevant activity range and time period: • Fixed cost stays constant in total. Fixed cost per unit falls as output increases. • Variable cost changes in total with activity. Variable cost per unit remains constant in the linear model. • Mixed cost has both a fixed amount and a variable component: total cost = fixed cost + variable rate × activity. • Step cost stays level within a capacity band, then jumps when another resource is needed. EXAMPLES FROM THE LESSON A $10,000 fixed rental cost is $100 per box at 100 boxes, $50 at 200 boxes and $10 at 1,000 boxes. Total rent remains $10,000 within the assumed capacity range. At zero output, cost per unit cannot be calculated by dividing by zero. At $2 variable cost per box, total variable cost is $2, $4, $6 and $8 for one through four boxes. The $2 rate stays constant; total cost rises with volume. In the later comparison, $100,000 fixed cost plus $8 variable cost per unit gives: 10,000 units: $180,000 total, or $18 per unit. 20,000 units: $260,000 total, or $13 per unit. These are simplified cost models. Fixed costs are not fixed forever, and the relevant range matters. PRODUCT VS. PERIOD COSTS Under the manufacturing absorption-costing model used here, product cost includes direct materials, direct labor and manufacturing overhead. Ordinary production costs flow through raw materials, work in process and finished goods before becoming cost of goods sold when sold. Period costs, such as selling and general administration, are expensed in the period incurred rather than included in manufacturing inventory. Manufacturing overhead includes indirect materials, indirect labor and other eligible production costs. A factory supervisor or factory janitor supports production; a corporate-office role serves a different function. Classify by the cost's purpose and applicable rules, not merely which building it occurs in. Not every expenditure at a factory qualifies for capitalization. PRIME & CONVERSION COST FORMULAS Prime costs = direct materials + direct labor. Conversion costs = direct labor + manufacturing overhead. Direct labor appears in both, so adding prime and conversion costs together double counts it. COMMON QUESTIONS Is a direct cost always variable? No. Direct/indirect describes traceability to a cost object; fixed/variable describes how the cost changes with activity. These are separate classifications. Why ignore sunk costs in a decision? A sunk cost has already occurred and cannot be changed by the alternatives now being considered. Evaluate future differences; a possible future recovery or disposal value is a separate consideration. Does this lesson calculate mixed costs with high-low or regression? No. It introduces mixed-cost behavior; detailed estimation methods are covered separately. CONTINUE STUDYING Cost Accounting Basics:    • Cost Accounting Basics: Cost Behavior, Cos...   Cost Accounting Full Course:    • Cost Accounting Full Course | Complete Col...   More lectures and practice: https://farhatlectures.com #CostAccounting #CostBehavior #CMAExam