2.1 Costs and Cost Behaviour

2026 Syllabus Objectives

By the end of this topic, you should be able to:

Account for material and labour costs
Identify and calculate fixed costs, variable costs, semi-variable costs, and stepped costs
Identify and calculate the elements of direct and indirect costs
Calculate the value of closing inventory using the FIFO and AVCO methods (both perpetual and periodic)
Understand the principles of Just in Time (JIT) management of inventory
Use your understanding of materials and labour costs to evaluate information and make informed business decisions

A cost is the amount of money a business spends in order to make its product or provide its service.

In cost and management accounting, we study costs carefully so that managers can:

There are two main types of resources that create costs in most businesses:

Materials — the physical things used to make a product (e.g. wood, fabric, flour)
Labour — the people who do the work (e.g. factory workers, machine operators)

Cost behaviour means: how does a cost change when the amount of goods produced (output) goes up or down?

This is very important. Not all costs behave the same way.

There are four types of cost behaviour you must know:

A fixed cost stays the same no matter how many units are produced.

Even if a factory produces 0 units or 10,000 units, the fixed cost does not change.

Examples of fixed costs:

💡 Think of it this way: Rent on a building does not go up just because you made more products.

On a graph, a fixed cost appears as a straight horizontal line — it stays flat regardless of how much is produced.