Cost Classification and Behaviour
Cost Fundamentals
Cost Classification and Behaviour
Syllabus tag: KASNEB CPA | Intermediate Level | CA25 Management Accounting | Topic 1 Cost Classification and Behaviour
Lesson objectives
By the end of this topic, you will be able to:
- Classify costs by element, by function, by traceability and by behaviour
- Distinguish fixed, variable, semi-variable and stepped costs
- Separate a semi-variable cost using the high-low method
- Build a cost equation and use it to predict cost at a new volume
- Explain why the same cost can be classified differently for different purposes
Why this matters
Financial accounting asks what a cost was. Management accounting asks what a cost will do — whether it rises with output, stays flat, or jumps at a threshold. Every later topic in this paper depends on getting that right.
Words to know
- Cost object — whatever is being costed: a product, a job, a department.
- Direct cost — traceable to one cost object without apportionment.
- Indirect cost (overhead) — shared, so it must be apportioned.
- Fixed cost — unchanged in total as volume changes.
- Variable cost — changes in total, but constant per unit.
- Semi-variable cost — has both a fixed and a variable element.
- Stepped cost — fixed over a range, then jumps.
- Relevant range — the span of activity over which the behaviour holds.
Four ways to classify
By element: materials, labour, expenses.
By function: production, administration, selling and distribution, finance.
By traceability: direct or indirect. Note this depends on the cost object, not on the cost. A supervisor's salary is indirect to a product and direct to the department.
By behaviour: fixed, variable, semi-variable, stepped. This is the classification management accounting cares about most.
How costs behave
| Behaviour | In total | Per unit |
|---|---|---|
| Fixed | Constant | Falls as volume rises |
| Variable | Rises with volume | Constant |
That table is the whole idea, and the per-unit column is where candidates lose marks. A fixed cost of KES 500,000 is 50 per unit at 10,000 units and 25 at 20,000 — the total has not moved at all.
Stepped costs are fixed within a range then jump. One supervisor handles up to 20 staff; the 21st requires a second supervisor and the cost steps up.
Relevant range matters because no cost behaves in a straight line for ever. Rent is fixed until the factory is full and a second building is needed. Every statement about behaviour carries an unspoken "within the relevant range".
Separating a semi-variable cost: the high-low method
A power bill contains a standing charge plus a usage element.
| Month | Units produced | Total cost (KES) |
|---|---|---|
| Highest | 14,000 | 2,180,000 |
| Lowest | 8,000 | 1,460,000 |
Step 1 — variable cost per unit
= (2,180,000 − 1,460,000) / (14,000 − 8,000) = 720,000 / 6,000 = KES 120
Step 2 — fixed cost, using the high point
= 2,180,000 − (120 × 14,000) = 2,180,000 − 1,680,000 = KES 500,000
Using the low point gives the same answer: 1,460,000 − (120 × 8,000) = 500,000. If the two disagree, the arithmetic is wrong.
Step 3 — the cost equation
y = 500,000 + 120x
At 11,000 units: y = 500,000 + 1,320,000 = KES 1,820,000
:::checkpoint The high-low method uses only two of the twelve months' data and ignores the other ten. Give one situation in which that would produce a badly wrong cost equation, and name a technique that would use all the data. :::
The same cost, classified differently
A factory supervisor's salary is:
- Indirect to a product, direct to the department
- Fixed with respect to output, variable with respect to the number of shifts run
- Irrelevant to a decision on accepting one extra order, relevant to a decision on closing the department
There is no single correct classification. The question is always "classified for what purpose?", and a candidate who answers without asking that has misunderstood the topic.
:::checkpoint A company describes depreciation on its delivery vans as a fixed cost. Under what circumstance would that be wrong, and what would it become instead? :::