Cost Behaviour in Flexible Budget

To prepare a flexible budget, students must understand cost behaviour:

1. Variable Cost

• Changes in total with activity level.
• Cost per unit is constant.

Example: direct material, direct labour, sales commission.

Total variable cost=Cost per unit×Number of units

2. Fixed Cost

• Total cost is constant (within relevant range), even if activity changes.
• Cost per unit will change.

Example: factory rent, supervisor salary, depreciation.

3. Semi-variable / Mixed Cost

• Has fixed part + variable part.
• Example: electricity, maintenance.
• Need to separate into fixed and variable elements before preparing flexible budget.