Hi, Else here.
And today we're going to cover cost behavior
patterns, variable, fixed, and mixed costs.
Let's start with variable costs.
The easiest way to show variable costs is to use a graph.
I'm going to focus on a manufacturing environment,
just because it's a little bit easier to understand.
But keep in mind that these concepts also apply
to non-manufacturing environments,
such as providing services.
In this case, the y-axis is total variable costs.
And the x-axis is the level of activity.
I'm going to use the short form.
The level of activity in this case is how many units
we actually produce, because we're
working with a manufacturing environment.
If I produce zero units, the variable costs
will be zero because variable costs vary
with the level of activity.
Every time I produce one more unit,
my variable costs are going to increase.
Total variable costs vary with the level of activity.
When I'm looking at this graph, this slope
is equal to the per unit variable cost.
Notice that the slope doesn't change
with the level of activity.
If I now graph the per unit variable costs,
you can see that the per unit variable costs are constant.
They don't change with the level of activity.
Total variable costs vary with the level of activity.
Per unit variable costs are constant with the level
of activity variable costs.
An example of a variable cost would be the direct material
that you actually use or consume in order to produce a product.
It could also be the amount of labor
that has to be consumed in order to produce one unit of product.
Both of these are variable costs because, if we produce
no units, we're not going to use any direct materials
and we're not going to use any labor.
Let's move onto fixed costs.
Again, we're going to use a graph in order
to demonstrate this and we're using a manufacturing
environment.
The x-axis is still level of activity.
But the y-axis is total fixed costs.
Regardless of our level of activity,
even if we're producing zero, the fixed costs
are still going to be incurred.
Our fixed costs are constant, regardless
of the level of activity.
What if we look at per unit fixed costs?
Again, the x-axis is going to be level of activity.
If we produce zero units, how much will it cost us?
We can see from our total fixed costs graph
that it's still going to cost us money.
Let's assume $100,000.
So even if I produce zero units, it's going to cost me $100,000.
What if I produce one unit?
It's still going to cost me $100,000.
What if I produced two units?
If I produced two units, it's only
going to cost me $50,000 per unit.
$100,000 divided by two units is going
to be equal to $50,000 per unit.
What if I produced four units?
$100,000 divided by 4 units is going
to equal $25,000 per unit.
You can see what's happening here.
Our per unit fixed cost is an exponential.
Every time we produce additional units,
it's going to decrease the cost per unit.
Fixed cost per unit vary with the level of activity.
However, total fixed costs are constant
regardless of the level of activity.
Going back to variable costs, per unit variable costs
are constant, regardless of the level of activity,
whereas total variable costs vary
with the level of activity.
Is this always true?
That depends on the relevant range.
And that's a concept that I'll cover in my next video.