Behaviour-Based Classification of Cost

Behaviour-based classification looks at how a cost's total amount responds to a change in the level of output or activity — this is the classification that matters most for cost control, budgeting, and decision-making (e.g., deciding whether to accept a special order at a lower price, or how a change in production volume will affect total cost).

Fixed Cost

A Fixed Cost remains constant in total, for a given period, regardless of the level of output — within a defined range of activity (the "relevant range"). Examples: factory rent, insurance premium on the factory building, straight-line depreciation, salary of permanent administrative staff. Because the total stays the same, the fixed cost per unit actually falls as output rises (the same rent is spread over more units) and rises as output falls.

Variable Cost

A Variable Cost changes in direct (broadly proportionate) relation to the level of output — as output rises, total variable cost rises; as output falls, it falls. Examples: direct material consumed, direct labour paid on a piece-rate basis, power consumed in proportion to machine running hours. The variable cost per unit, in contrast to fixed cost, tends to remain constant regardless of the volume produced.

Semi-Variable (Semi-Fixed) Cost

A Semi-Variable Cost has both a fixed and a variable element within the same cost head — part of it must be paid regardless of output (the fixed component), and part of it rises with output/activity (the variable component). Examples: a telephone bill (a fixed monthly rental plus variable call charges), an electricity bill (a fixed minimum/demand charge plus a per-unit consumption charge), repairs and maintenance of machinery (a base level of upkeep plus extra repair cost as machine-running hours increase). Such costs cannot be classified purely as fixed or purely as variable — for cost-control and estimation purposes, their fixed and variable elements are usually separated out.