Page 15 - Managerial Accounting-MGT 145

Module 3: Decision Making (Cost Patterned Behavior)

Variable Costs
Variable costs will fluctuate based on how much product is
sold/created. The cost of purchasing “chrome tubes” for Bikes
Unlimited is a variable cost because it depends on how many

bikes are sold out. It will be zero if there is nothing sold.

Fixed Costs
Fixed costs are incurred whether Bikes Unlimited sells zero
units or a billion units. Example of Fixed Cost is payment of the
Annual Rent of Bikes Unlimited for its factory/warehouse :
Even if Bikes Unlimited chose to make no bikes, it still
needs to continue to pay its Rental fees. There are two kinds
of fixed costs: (1) some are "committed", those that must

happen, such as the rent/lease payment stated above, and
others that are “discretionary”, such as advertising or
research and development. Both of these activities could be
suspended in the short term.

Mixed Costs
Bikes Unlimited also has mixed costs which have both a fixed
and a variable components. You can think of your cell phone
bill as a mixed cost. You pay a flat fee (fixed cost) for a certain
number of minutes. If you exceed the set amount of minutes,
then you have to pay by the minute (variable cost). Bikes

Unlimited pays its sales staff based on a base salary(fixed)
plus a commission based on units sold (variable) and, finally,
a year-end bonus based on overall profitability (mixed),
which demonstrates all three cost behavior patterns.