COST BEHAVIOUR

 Cost behaviour patterns demonstrate the way in which costs

are affected by changes in the level of activity

 Instead of categorising materials, labour and expenses costs

into direct and indirect costs, it can sometimes be very useful
to use a different system, one that is based on cost behaviour.

 Cost behaviour is the way that costs change as the level of

activity changes.

 The level of activity refers to the amount of work done, or the

volume of production.
COST BEHAVIOUR
 Costs are either

 variable or
 fixed,

depending upon whether they change in total when the volume of

production changes.
VARIABLE COST
 A variable cost is a cost which tends to vary in total directly with the
volume of output.

 Total variable cost increases as volume of output increases.

VARIABLE COST
 A sketch graph of total variable costs would look like this.
VARIABLE COST
The following are variable costs.

 The cost of raw materials, because the volume of raw materials

purchased relates to the volume used in production.

 Direct labour costs. This is due to the ability to increase or decrease

the number of workers and therefore the total cost.

 Sales commission is variable in relation to the volume or value of

sales.
FIXED COST
 A fixed cost is a cost which tends to be unaffected in total by
increases or decreases in the volume of output.

 Fixed costs are a period charge, in that they relate to a span of time.
FIXED COST
 A sketch graph of a total fixed cost would look like this.
FIXED COST
The following are fixed costs.

 The salary of the managing director (per month or per annum)

 The rent of a single factory building (per month or per annum)
 Straight line depreciation of a single machine (per month or per
annum)
EXAMPLE
 Are each of the following likely to be variable or fixed costs?

(a) Charges for telephone calls made

(b) Charges for rental of telephone
(c) Annual salary of the chief accountant
(d) Managing director's subscription to the Institute of Directors
(e) Cost of materials used to pack 20 units of product X into a box
EXAMPLE
 Which of the following would be classified as a fixed cost in the
operation of a motor vehicle?

 A Petrol

 B Insurance.

 C Tyre replacement
EXAMPLE
 Prime cost is

 A All costs incurred in manufacturing a product

 B The total of all direct costs

 C The material cost of a product

 D The cost of operating a department

STEPPED FIXED COST
 Constant over a range of activity then a sudden increase, then
constant again

 An example would be the salary of supervisors.

 One supervisor for up to six workers,
 two for up to 12 workers, etc.
STEPPED FIXED COST
 A sketch graph of a Stepped fixed cost would look like this.
MIXED COST
 Semi Fixed / Semi Variable Cost

 Semi-variable costs have a fixed element and a variable element.

 An example would be a telephone bill. Usually there is a fixed cost for

the line rental then each minute of telephone calls causes an
additional cost.
MIXED COST
 A sketch graph of a Mixed Cost would look like this.
COST PER UNIT
 Since a cost centre manager is responsible for costs, cost per unit
produced or supplied is an obvious measure.

 A simple way to calculate this is to divide the costs incurred in a

period by the units produced in the period.

___$___
Units
VARIABLE COST PER UNIT
 Total pure variable costs increase in direct proportion to units
produced.

 If output doubles then total variable costs double.

 However, in simple cases the variable cost per unit will stay constant.
VARIABLE COST PER UNIT
 A sketch graph of a Variable Cost per Unit would look like this.
FIXED COST PER UNIT
 Total pure fixed costs are constant over a given range of production
but Fixed cost per unit is Variable in nature.

 However, the fixed cost per unit will decrease because the constant
fixed costs are being spread over more items
FIXED COST PER UNIT
 A sketch graph of a Fixed Cost per Unit would look like this.
EXAMPLE
 Variable cost per unit = $5 Fixed costs = $1,000

UNITS VARIABLE COST/UNIT TOTAL VARIABLE COST

100 $ 5 / UNIT

200 $ 5 / UNIT

300 $ 5 / UNIT

400 $ 5 / UNIT

500 $ 5 / UNIT

600 $ 5 / UNIT
EXAMPLE
 Variable cost per unit = $5 Fixed costs = $1,000

UNITS VARIABLE COST/UNIT TOTAL VARIABLE COST

100 $ 5 / UNIT 500

200 $ 5 / UNIT 1000

300 $ 5 / UNIT 1500

400 $ 5 / UNIT 2000

500 $ 5 / UNIT 2500

600 $ 5 / UNIT 3000

EXAMPLE
 Variable cost per unit = $5 Fixed costs = $1,000

UNITS TOTAL FIXED COST PER UNIT FIXED COST

100 $ 1,000

200 $ 1,000

300 $ 1,000

400 $ 1,000

500 $ 1,000

600 $ 1,000
EXAMPLE
 Variable cost per unit = $5 Fixed costs = $1,000

UNITS TOTAL FIXED COST PER UNIT FIXED COST

100 $ 1,000 $ 10.00 /UNIT

200 $ 1,000 $ 5.00 /UNIT

300 $ 1,000 $ 3.33 /UNIT

400 $ 1,000 $ 2.50 /UNIT

500 $ 1,000 $ 2.00 /UNIT

600 $ 1,000 $ 1.67 /UNIT

EXAMPLE
 Variable cost per unit = $5 Fixed costs = $1,000

UNITS VARIABLE TOTAL TOTAL FIXED PER UNIT

COST/UNIT VARIABLE COST FIXED COST
COST
100 $ 5 / UNIT 500 $ 1,000 $ 10.00 /UNIT

200 $ 5 / UNIT 1000 $ 1,000 $ 5.00 /UNIT

300 $ 5 / UNIT 1500 $ 1,000 $ 3.33 /UNIT

400 $ 5 / UNIT 2000 $ 1,000 $ 2.50 /UNIT

500 $ 5 / UNIT 2500 $ 1,000 $ 2.00 /UNIT

600 $ 5 / UNIT 3000 $ 1,000 $ 1.67 /UNIT

EXAMPLE

 A mail order company distributes sales items by post. All other

communication is by email or the internet. Are postage costs likely to
be:

 A Fixed
 B Variable.
 C Semi-variable
 D Stepped fixed
EXAMPLE

 A company rents a factory that will allow production of up to 10,000

units per month.

 If the company is considering a new order that would push

production to 15,000 units, rental costs will be:

 A Fixed
 B Variable
 C Semi-variable
 D Stepped fixed
EXAMPLE

 A company pays its staff a basis wage plus a bonus based on

production.

 Wage costs are likely to be:

 A Fixed
 B Variable
 C Semi-variable
 D Stepped fixed
EXAMPLE

 A Co makes 50,000 Units per year. Each Unit requires 2 hours of

labour at $10 per hour and 1 bought-in component, costing $1.25,

 Calculate the Prime cost.

EXAMPLE

 B Co makes 100,000 Units per year. Each Brace requires 5 hours of

labour at $15 per hour and 2 bought-in components, costing $2 and
2.40 each respectively.

 Calculate the Prime cost.

EXAMPLE

 C Co makes 10,000 Unit per year.

 Each Unit requires 5 hour of labour at $2.5 per hour and 3 bought-in
components, costing $1.50, $2.5 and 1.40 each respectively.
 Direct Expenses are 200% of Direct Labour.

 Calculate Prime Cost.

EXAMPLE

 D Co makes 20,000 Units per year.

 Each Unit requires ½ hour of labour at $5 per hour and 3 bought-in
components, costing $1.25, $2 and 40c each respectively.
 The packaging for all the Brace costs $16 for 100 boxes.

 Calculate Production Cost.

EXAMPLE

 Skeggy Co makes 20,000 Braces per year. Each Brace requires ½ hour
of labour at $5 per hour and 3 bought-in components, costing $1.50,
$3.00 and 1.80 each respectively.
 The packaging for all the Brace costs $20 for 100 boxes.

 The business incurs fixed production costs of $4,000 per annum,

 The cost of selling, administration and distribution works out at 50c

per item sold.

 Calculate the production cost and the total cost of a Brace and record
this information on a cost card.
EXAMPLE

 Skeggy Co makes 20,000 Braces per year. Each Brace requires ½ hour
of labour at $5 per hour and 3 bought-in components, costing $1.50,
$3.00 and 1.80 each respectively.
 The packaging for all the Brace costs $20 for 100 boxes.

 The business incurs fixed production costs of $4,000 per annum,

 The cost of selling, administration and distribution works out at 50c

per item sold.

 Calculate the production cost and the total cost of a Brace and record
this information on a cost card.