SingaporeAccountingSyllabus dot point

How are costs classified by behaviour and by function, and why does cost behaviour matter for decisions?

Classify costs by behaviour and by function and explain how fixed and variable costs respond to changes in activity

A focused answer to the H2 Principles of Accounting outcome on cost classification. Fixed, variable, semi-variable and stepped costs, classification by function, the high-low method, and why cost behaviour drives management decisions.

Generated by Claude Opus 4.810 min answerUpdated 2026-06-06

Reviewed by: AI editorial process; not yet individually human-reviewed

Have a quick question? Jump to the Q&A page

Jump to a section

What this dot point is asking
The answer
Examples in context
Try this

What this dot point is asking

SEAB wants you to classify costs by behaviour (how they respond to activity) and by function (where they arise), and to explain how fixed and variable costs react as output changes. Cost behaviour is the foundation of the whole management-accounting strand: marginal costing, break-even and budgeting all depend on splitting costs into fixed and variable. The central insight is that the same total cost behaves very differently per unit depending on whether it is fixed or variable, and managers must know which is which to plan and decide well.

The answer

Classification by behaviour

Cost type	Total as output rises	Per unit as output rises	Example
Variable	Rises proportionately	Constant	Direct materials
Fixed	Unchanged (within range)	Falls	Factory rent
Semi-variable	Rises, but not proportionately	Falls (mixed)	Phone bill (rental plus calls)
Stepped fixed	Jumps at intervals	Falls then jumps	Supervisor salaries (one per shift)

The key contrast: total variable cost rises with output while its per-unit figure is constant; total fixed cost is flat while its per-unit figure falls as it is spread over more units. This per-unit behaviour is why higher output usually lowers average cost.

Classification by function

Costs are also grouped by the part of the business that incurs them:

Production costs - direct materials, direct labour, and production overheads.
Non-production costs - administrative, selling and distribution, and finance costs.

This functional split feeds the income statement layout and the distinction between product costs (attached to inventory) and period costs (expensed as incurred).

Splitting a semi-variable cost: the high-low method

To separate the fixed and variable elements of a semi-variable cost, the high-low method compares the highest and lowest activity levels:

\text{Variable cost per unit} = \frac{\text{cost at high} - \text{cost at low}}{\text{units at high} - \text{units at low}}

Fixed cost is then found by subtracting the variable cost from the total at either level. The result lets a manager predict total cost at any activity level as fixed cost plus variable cost per unit times units.

Worked example

A delivery firm's total costs were $\$ 50,000 $for$ 10,000 $deliveries and$ \ $74\,000$ for $16\,000$ deliveries. Use the high-low method to find the cost behaviour and predict the cost of $13\,000$ deliveries.

Step 1: Variable cost per delivery

\frac{74\,000 - 50\,000}{16\,000 - 10\,000} = \frac{24\,000}{6\,000} = \$4 \text{ per delivery}

Step 2: Fixed cost

At $10\,000$ deliveries, variable cost $= 10\,000 \times 4 = \$ 40,000 $. Fixed cost$ = 50,000 - 40,000 = \ $10\,000$ .

Step 3: Build the cost equation

\text{Total cost} = 10\,000 + 4 \times \text{deliveries}

Step 4: Predict 13,000 deliveries

\text{Total cost} = 10\,000 + 4 \times 13\,000 = 10\,000 + 52\,000 = \$62\,000

The fixed cost of $\$ 10,000 $stays constant while the variable element scales with activity, letting the firm budget for any delivery volume. Note the fixed cost per delivery falls from$ \ $1.00$ at $10\,000$ to about $\$ 0.77 $at$ 13,000$, illustrating the spreading effect.

Examples in context

Example 1. Economies of scale from fixed costs. A bakery's oven and rent cost $\$ 20,000 $a year whether it bakes$ 10,000 $or$ 40,000 $loaves. At$ 10,000 $loaves the fixed cost is$ \ $2.00$ each; at $40\,000$ it is just $\$ 0.50$ each. The variable cost (flour, energy per loaf) stays the same per unit. Spreading the fixed cost over more output cuts the average cost, which is the cost-behaviour explanation for economies of scale.

Example 2. A stepped cost in a call centre. One supervisor can manage up to $10$ agents. With $11$ agents a second supervisor is needed, so supervisor cost jumps from one salary to two. The cost is fixed within each band of $10$ agents but steps up at the boundary. Recognising stepped costs prevents a manager from assuming costs rise smoothly when in fact they jump at capacity points.

Try this

Q1. Classify each by behaviour: raw materials, factory insurance, a phone bill with line rental plus call charges. [2 marks]

Cue. Raw materials - variable; factory insurance - fixed; phone bill - semi-variable (fixed rental plus variable calls).

Q2. Total cost is $\$ 30,000 $at$ 2,000 $units and$ \ $42\,000$ at $5\,000$ units. Find the variable cost per unit. [2 marks]

Cue. $\dfrac{42\,000 - 30\,000}{5\,000 - 2\,000} = \dfrac{12\,000}{3\,000} = \$ 4$ per unit.

Q3. Explain why the fixed cost per unit falls as output rises. [2 marks]

Cue. Total fixed cost is unchanged, so dividing it by a larger number of units gives a smaller figure per unit; the cost is spread more thinly as output grows.

Exam-style practice questions

Practice questions written in the style of SEAB exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

Original7 marksA factory's total costs were

\

80\,000

at

4\,000

units and

104\,000

6\,000

units. Using the high-low method, (a) find the variable cost per unit, (b) find the total fixed cost, and (c) estimate the total cost at

5\,000

units.

Show worked answer →

The high-low method uses the highest and lowest activity levels.

(a) Variable cost per unit $= \dfrac{\text{change in cost}}{\text{change in units}} = \dfrac{104\,000 - 80\,000}{6\,000 - 4\,000} = \dfrac{24\,000}{2\,000} = \$ 12 \text{ per unit}$.

(b) Fixed cost: at $4\,000$ units, variable cost $= 4\,000 \times 12 = \$ 48,000 $, so fixed cost$ = 80,000 - 48,000 = \ $32\,000$ . (Check at $6\,000$ units: $6\,000 \times 12 = 72\,000$ ; $104\,000 - 72\,000 = \$ 32,000$.)

(c) Total cost at $5\,000$ units $= \text{fixed} + (\text{variable per unit} \times \text{units}) = 32\,000 + (12 \times 5\,000) = 32\,000 + 60\,000 = \$ 92,000$.

Markers reward the variable cost of $\$ 12 $per unit, fixed cost of$ \ $32\,000$ , and a total cost of $\$ 92,000 $at$ 5,000$ units.

Original5 marksExplain the difference between fixed, variable and semi-variable costs, giving an example of each, and state how the fixed cost per unit changes as output rises.

Show worked answer →

A fixed cost stays the same in total regardless of output within the relevant range. Example: factory rent. A variable cost changes in direct proportion to output. Example: direct materials. A semi-variable (mixed) cost has both a fixed and a variable element. Example: a telephone bill with a fixed line rental plus a charge per call, or a machine with fixed maintenance plus a usage-based element.

As output rises, the total fixed cost is unchanged, but the fixed cost per unit falls, because the same total is spread over more units. This is the source of economies of scale: $\dfrac{\text{fixed cost}}{\text{units}}$ decreases as units increase. Variable cost per unit, by contrast, stays constant.

Markers reward the three definitions with valid examples and the key point that fixed cost per unit falls as output rises while total fixed cost is unchanged.