What are the benefits of analyzing cost behavior in invoice processing?

2 Classify the costs

The second step in analyzing cost behavior is to classify the costs into different categories, based on how they respond to changes in the cost drivers. Generally, costs can be divided into three main types: variable, fixed, and mixed. Variable costs, such as postage and printing for paper invoices, change proportionally with the cost driver. On the other hand, fixed costs, such as a full-time invoice clerk’s salary, remain constant regardless of the number of invoices processed. Lastly, mixed costs have both a variable and a fixed component; for example, the software license fee for an invoice processing system has a fixed annual fee and a variable fee per invoice processed. By classifying the costs in this way, you can better understand the effects of different cost drivers and calculate total invoice processing costs more accurately.

3 Estimate the cost function

The third step in analyzing cost behavior is to estimate the cost function, which is a mathematical equation that shows the relationship between the total costs and the cost driver. The cost function can be expressed as:

Total costs = Fixed costs + Variable costs per unit x Cost driver

For example, if the fixed costs of invoice processing are $1,000 per month, the variable costs per invoice are $0.50, and the number of invoices processed is 2,000, then the total costs are:

Total costs = $1,000 + $0.50 x 2,000

Total costs = $2,000

By estimating the cost function, you can predict how your invoice processing costs will change with different levels of activity and plan your budget accordingly.

4 Analyze the cost behavior

The fourth and final step in analyzing cost behavior is to analyze the cost behavior, which is the pattern of how costs change with the cost driver. This analysis consists of two main aspects: the cost behavior pattern, which describes the general behavior of costs (linear, curvilinear, or stepwise), and the cost behavior sensitivity, which measures how sensitive the costs are to changes in the cost driver (high, moderate, or low). Through this analysis, you can assess how your invoice processing costs influence your profitability and performance, and detect potential opportunities to reduce or optimize your costs.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?