Cost Behavior Patterns

Review Problem 5.1

Sierra Company is trying to identify the behavior of the three costs shown in the following table. The following cost information is provided for six months. Calculate the cost per unit, and then identify how each cost behaves (fixed, variable, or mixed). Explain your answers.

Cost 1 Cost 2 Cost 3
Month Units Produced Total Costs Cost per Unit Total Costs Cost per Unit Total Costs Cost per Unit
1 50 $100 $2.00 $100 $2.00 $100 $2.00
2 100 200 2.00 100 1.00 150 1.50
3 150 300 _____ 100 _____ 200 _____
4 200 400 _____ 100 _____ 250 _____
5 250 500 _____ 100 _____ 300 _____
6 300 600 _____ 100 _____ 350 _____

Solution to Review Problem 5.1

As shown in the following table, cost 1 is a variable cost because as the number of units produced changes, total costs change (in proportion to changes in activity) and per unit cost remains the same. Cost 2 is a fixed cost because as the number of units produced changes, total costs remain the same and per unit costs change. Cost 3 is a mixed cost because as the number of units produced changes, total cost changes (but not in proportion to changes in activity) and per unit cost changes.

Cost 1 Cost 2 Cost 3
Month Units Produced Total Costs Cost per Unit Total Costs Cost per Unit* Total Costs Cost per Unit*
1 50 $100 $2.00 $100 $2.00 $100 $2.00
2 100 200 2.00 100 1.00 150 1.50
3 150 300 2.00 100 0.67 200 1.33
4 200 400 2.00 100 0.50 250 1.25
5 250 500 2.00 100 0.40 300 1.20
6 300 600 2.00 100 0.33 350 1.17
*Rounded.