 There's a few different ways that we can classify costs and they all have their pros and cons their benefits to classification in different ways, we're gonna classify costs here by behavior Now you may think what does that mean do costs have behavior and we can say well Yeah, costs do have behavior in that they act in certain ways in relation to other activities We're gonna classify the two types of costs here being fixed costs and variable costs This type of Classification is not included in financial accounting. So if you're going from financial accounting to managerial accounting This is going to be a new concept and the reason we're gonna have cost classifications by behavior is that it really helps with Projections so we have to have this because when we're looking into the future What's really gonna be helpful if we can determine how costs act so that we can make projections based on different levels of Production so we have fixed costs fixed costs mean that as production level rises the cost remains fixed So for example if we have the activity down here We'll say this is production if we're making units of something as we make more units of something The cost total remains the same remember here that we're talking about total cost not cost per unit We're starting here with total cost So for example if we're saying that the rent is gonna be a thousand dollars a month Then it really doesn't matter how many units we make if we're producing things in a warehouse And we make one unit in that warehouse Then it still costs a thousand dollars if we are producing in that warehouse and we make say a hundred things the rent still is a Thousand dollars if we keep producing in that warehouse and we maximize the production of the warehouse Let's say it's five thousand things Well, then units of production whatever we make then it's still gonna cost us a thousand dollars no matter what we do The rent is gonna be the same and so if you look at that in terms of the fixed costs, you're gonna say well It's gonna be what it is no matter what so when making projections then we can think of okay How many units do we have to produce in order to? Pay off the rent pay off the fixed cost So the other types of behavior that we're gonna have the major second group that we're gonna have and we're gonna try to come Basically break everything out into these two groups even though it's not possible or not all costs fit nicely into these two groups We would really like it if they did because that would simplify the world here And we're gonna try to do so so that we can make accurate projections And so the other type is variable costs and variable costs are gonna go up With each new unit of production So for example if we're making guitars and this is the cost of wood the total cost of wood And this is the activity how many guitars we're gonna make well if we make one guitar, then it's gonna cost Or if we make one guitar here, it's gonna cost so much and then if we make two guitars well they the Activity went up and the cost is gonna go up in proportion it's gonna be a straight line because The cost is gonna go up with the same Number of units let's say the cost is for wood that's gonna go in the guitar if we make three guitars Well, then the cost of wood is gonna go up in proportion To the number of guitars that we're making so so wood or direct material That goes into into the cost of production is gonna go up You would at a constant rate and as opposed to something that is fixed such as the rent if we know those two things Then it's really useful for us to then make projections into the future because now we can say okay How many guitars do we need to make in order to you know get to this level of cost and of course We'll add into this pretty soon. We'll add into it the amount of revenue per guitar We're gonna get and if we take the revenue minus the variable cost Then we can say okay, how much are we making over the variable cost? To see how many units we then need to have in order to clear the rent price And that's how we start to kind of think about these things What do we need to produce in order to clear our costs? It's a lot easier to make those types of production projections if we can break all costs up by Behavior between fixed costs and variable costs now some costs will line up in these two very easily And it won't be a problem if we're talking about wood in the guitar Then that's probably pretty straightforward if we're talking about the rent. That's pretty straightforward But we're gonna have some things that aren't quite as easy to go into these two components. They may have