Cost & Management Accounting (MGT-402)
Division of cost by its behavior
Basically the cost of production has two behaviors:
1. Fixed Cost
2. Variable Cost
Fixed Cost
It is a cost which tends to be constant by increases or decreases in the activity level.
This graph shows that the cost remains fixed regard less of the volume of output.
Examples include:
a. Salary of the production manager (monthly/annual)
b. Insurance premium of factory work shop
c. Depreciation on straight line method
Variable Costs
A variable cost is a cost which tends to very directly with the change in activity level. The variable
cost per unit is the same amount for each unit produced whereas total variable cost increases as
volume of output increases.
This graph shows a proportionate increase in the cost by the increase in the activity level.
Examples include:
a. Cost of raw-material consumed
b. Direct labor cost
c. Selling commission
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