This cost behavior analysis template shows you how a cost changes with fluctuations in the level of activity relating to that cost.
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Cost behavior analysis refers to management’s attempt to understand how operating costs change in relation to a change in an organization’s level of activity. These costs may include direct materials, direct labor, and overhead costs that are incurred from developing a product. Management typically performs cost behavior analysis through mathematical cost functions.
Cost functions are descriptions of how a cost (i.e. material, labor, or overhead) changes with fluctuations in the level of activity relating to that cost. For example, total variable costs will change in relation to increased activity, while fixed costs will remain the same. Cost functions may come in various forms.
Cost Function Assumptions
Cost functions are usually given in the form of y = mx + b and can be plotted on a graph.
In order to determine these cost functions, managers typically make the following assumptions for simplicity purposes:
Variations in the cost driver explain the variations in the related total costs.
Cost behavior can be summarized into a linear cost function within a relevant range.
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