In the remainder of this section, we focus on the cost behavior role of cost drivers. Cost drivers can be used to provide both the cost assignment and cost behavior roles at the same time. Occasionally, the relationship is inverse for example, assume the cost driver is degree of temperature, then in the colder times of the year, increases in this cost driver will decrease total heating cost. Generally, an increase in a cost driver will cause an increase in total cost. (2) Explaining cost behavior: how total costs change as the cost driver changes. (1) Enabling the assignment of costs to cost objects. Understanding cost behavior is a critical aspect of cost-volume-profit analysis.Ĭost drivers provide two important roles for the management accountant: For example, if the usage of a production line is approaching its maximum capacity, the relevant cost behavior would be to expect a large cost increase (to pay for an equipment expansion) if the incremental demand level increases by a small additional amount. A business manager should be aware of cost behaviors when constructing the annual budget, to anticipate whether any costs will spike or decline. In cost accounting and managerial accounting.Ĭost behavior is the manner in which expenses are impacted by changes in business activity. Cost behavior is an indicator of how a cost will change in total when there is a change in some activity.
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