Costs do not all have the same relationship with the level of activity. Some are strictly proportional, meaning that they always increase by the same amount for every additional unit of activity; some are less than proportional (they increase but as a lower pace), more than proportional (they increase at a faster pace) or not proportional at all. Among the latter, some do not change at all while others change but their variation is either related to a different measure of activity or to managers’ discretion. All these differences between how costs change in relation to a specific change in activity are differences in cost behavior.
Cost behavior is a description of how total costs change when some measure of activity changes.
Technological, legal, contractual and even psychological factors affect how costs behave. These factors may complicate or facilitate (making more or less costly) adjustments in the amount of resources consumed, downwards, upwards or both. In this section, I will discuss how these factors shape different kinds of cost behaviors.
Implicitly, the classification of costs based on behaviors refers to two underlying attributes of costs: to what extent is resource consumption determined by, and thus proportional to, the level of activity? And is resource consumption flexible, i.e. can it be adjusted easily during the period? I will now introduce and define the different classes of cost behavior resulting from these two characteristics. We will then see later how defining a relevant range allows us to considerably simplify cost equations and to limit them to a variable and a fixed components, in bold in the following table:
|Flexible||1. Linear variable||2. Curvilinear variable||5. Discretionary fixed|
|Imperfectly flexible||3. Step variable|
|Inflexible||3. Step fixed||4. Committed fixed|