How are costs classified and how does their behaviour affect management decisions?
Classify costs as direct or indirect, fixed or variable, and explain cost behaviour, relevant range, and the use of cost classification in pricing and decision-making
WACE Year 12 Accounting and Finance Unit 4 on cost accounting: classifying costs as direct or indirect and fixed or variable, explaining cost behaviour and the relevant range, calculating total and per-unit costs, and applying cost classification to management decisions.
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What this dot point is asking
SCSA wants you to classify costs both ways, explain how fixed and variable costs behave as output changes, define the relevant range, and apply cost behaviour to decision-making.
Classification by traceability
Classification by behaviour
- Variable cost: changes in total in direct proportion to activity, but stays constant per unit. Example: materials at 800; make 200 and they are $1 600.
- Fixed cost: stays constant in total over a period regardless of activity, but falls per unit as output rises. Example: factory rent of $20 000 per year.
The relevant range
Total and per-unit cost
Total cost combines both behaviours:
Using classification in decisions
Knowing which costs are variable and which are fixed lets managers predict cost at different output levels, set prices that cover costs, and decide whether a special order or a make-or-buy choice is worthwhile.