Introduction
Costs are expenditures for raw materials, worker's wages, manufacturing over head and so forth. Costs are what you spend when you buy or make products for inventory. Reviewing cost behavior reveals to management how a cost will react or respond to changes in the level of business activity. As the activity rises and falls, a particular cost may rise and fall as well (Garrison & Noreen, 2000). Managers often need to be able to predict how costs will change in response to changes in activity. The activity might be the output of goods or services or it might be some measure of activity internal to the company such as the number of purchase orders processed during a period. This paper will discuss the categories of variable, fixed, mixed, indirect, direct, differential, opportunity and sunk costs. Cost as it relates to the financial statement. Costs are generally categorized as variable or fixed for purposes of cost behavior. For purposes of costs to objects such as products or departments, costs are classified as direct or indirect. Differential, opportunity and sunk costs are concepts used in making decisions.
Cost Behavior
Fixed costs are costs that do not change over a specific time period. These costs remain constant regardless of changes in levels of volume or activity. For example, the lease payments on a manufacturing facility do not change with the level of production. This would be a fixed cost. Variable costs are costs that do change over a specific time period. These costs fluctuate proportionately with changes in levels of volume or activity. For example, the total cost of materials to manufacture appliances would increase as production increases and decrease as production decreases. This wou ...