Costs-Volume Relationships:

Volume is defined in using a unit of measure termed as volume index. Volume index can be based upon manufacturing inputs, such as tons of raw material used in the procedure of production, labour hours utilized or hours in which machine has worked; or it can be depend upon the outputs, such as equivalent units of product produced, number of units sold, etc. After the determination of an appropriate volume index, costs may be classified into three general categories.

Variable Costs

Costs like labour, material, etc. which varies with the volume of units produced is called as variable cost. It enhances and decreases directly and proportionately with the changes in volume. If the volume increases by 10% then variable costs also increase by 10%.

Fixed Costs

The costs which remain unaffected (does not change) by the changes in the volume are termed as fixed or non variable cost. Costs like taxes, depreciation, debt, business insurance and mortgage payments which continue/or incur even if no production processes are carried out, is termed as fixed costs. These costs incur as a result of factors like time.

Semi-variable (or Mixed) Costs

One part of these costs is fixed and another part is variable, and therefore these are termed as semi-variable cost. Semi-variable cost changes with change in volume but the change is not proportional, i.e. a 10% increase in volume may result in just 5% increase in semi-variable costs. Depreciation of a machine is an instance of semi-variable cost as it depends upon the number of hours the machine is utilized.