Question

Following are five graphs representing various cost behaviors. (1) Identify whether the cost behavior in each graph is mixed, step-wise, fixed, variable, or curvilinear. (2) Identify the graph (by number) that best illustrates each cost behavior: (a) Factory policy requires one supervisor for every 30 factory workers; (b) real estate taxes on factory; (c) electricity charge that includes the standard monthly charge plus a charge for each kilowatt hour; (d) commissions to salespersons; and (e) costs of hourly paid workers that provide substantial gains in efficiency when a few workers are added but gradually smaller gains in efficiency when more workers are added.

Short answer

1. Cost behavior represented by the graph:

Graph No	Classification
1	Variable cost
2	Fixed cost
3	Mixed cost
4	Curvilinear cost
5	Step-wise cost

1. Cost behavior of each expense incurred by the business entity:

Cost	Graph No	Cost
(a) Supervisor salary	5	Stepwise cost
(b) Real estate taxes	2	Fixed cost
(c) Electricity charges	3	Mixed cost
(d) Sales commission	1	Variable cost
(e) Wages to workers	4	Curvilinear

Step-by-step solution

Definition of Expense

Any event that will lead to an outflow of benefits from the business entity is an expense. Expenses are fixed or variable depending on their movement according to the activity level.

Cost behavior according to graphs:

Graph 1: The first graph defines the variable cost because it increases gradually as the level of output increases.

Graph 2: This graph represents the fixed cost because it is a horizontal line reflecting the same cost incurred over each activity level.

Graph 3: This graph represents the mixed cost because the graph line does not start from the bottom of the vertical axis, meaning some expenses are fixed. The diagonal line represents that some portion of expense increases as per the activity level.

Graph 4: It represents the curvilinear cost because the graph reflects an increase in the cost per activity which is not constant.

Graph 5: It represents step-wise cost because it reflects the step-like structure, and the cost is the same for the relevant range of activity and will increase as soon as the activity level is more than the relevant range.

Cost behavior of each expense incurred

1. Factory supervisor’s salary is a type of step-wise cost because it will increase after each increase of 30 employees in the factory.
2. Real estate tax is a fixed cost because the government will charge the same tax each year depending on the area occupied by the company’s real estate.
3. Electricity charges are considered mixed costs because they include standard charges (fixed cost) and charges for each kilowatt used during the period.
4. Sales commission is a variable cost because it is provided based on the individual's sales, and therefore, it will increase and decrease according to sales made.
5. Wages paid to the worker is a curvilinear cost because it will continuously go up and down based on the workers added to the business operations.