cost behaviour

Question 1

cost behaviour

Answer 1

the way in which costs are affected by changes in the volume of output
- important for planning, control and decision making

Question 2

factors that influence costs

Answer 2

volume of output/level of activity

• value/number of items sold
• number of units of electricity consumed
• number invoices issued

Question 3

basic principles of cost behaviour

Answer 3

as the level of activity rises, costs will usually rise
will cost more to produce 2,000 units of output than it will cost to produce 1,000 units

Question 4

role of accountant in analysing cost behaviour

Answer 4

determine for each item of cost, the way in which costs rise and by how much as the level of activity increases.
- the level of activity for measuring cost will generally be taken to be the volume of production

Question 5

cost behaviour analysis

Answer 5

how costs change with the “level of activity” and by how much

Question 6

cost classification by cost behaviour

Answer 6

• Fixed Costs
• Variable Costs
• Semi-variable or semi-fixed or mixed costs
• Stepped costs

Question 7

fixed costs

Answer 7

a cost which tends to be unaffected in total by increases or decreases in the volume of output.
- a period charge, in that they relate to a span of time; as the time span increases, so too will the fixed costs

Question 8

examples of fixed costs

Answer 8

• salary of managing director (per month or per annum)
• rent of a single factory building (per month or per annum)
• Straight line depreciation of single machine (per month or per annum)

Question 9

graph for fixed costs (total + per unit)

Answer 9

straight line

decreasing exponential
Because the total fixed costs remain the same for all levels of activity, the fixed cost per unit decreases as more units are produced

Question 10

stepped fixed costs

Answer 10

cost which is fixed in nature but only within certain levels/ranges of activity

consider depreciation of a machine which may be fixed if production remains below 1,000 units per month. If production exceeds 1,000 units, a second machine may be required, and the cost of depreciation (on two machines) would go up a step

Question 11

examples of stepped fixed costs

Answer 11

e.g.
Rent: accommodation requirements increase as output levels get higher.
Supervisor salaries. One supervisor may be able to supervise a maximum of ten employees. When the number of employees increases above a multiple of ten an extra supervisor will be required.

Question 12

graph for stepped fixed costs (total + per unit)

Answer 12

ladder, like the opposite a tan graph (slanted L shape- starting point decreases in the next relevant range- bc economies of scale)

each horizontal part of the ladder is called RELEVANT RANGE __ numbered

Question 13

variable cost

Answer 13

cost which tends to vary in total directly with the volume of output. The variable cost per unit is the same amount for each unit produced

total variable costs increase/decrease in proportion to change in activity.
linear relationship between cost and activity

Question 14

variable cost graphs (total, per unit)

Answer 14

y=x, straight line

Question 15

what does a constant variable cost per unit imply

Answer 15

e.g. the price per unit of material purchased is constant, and the rate of material usage is also constant

Question 16

examples of variable costs

Answer 16

• cost of raw materials variable in relation to the level of production
• Sales commission is variable in relation to the volume/value of sales
• Bonus payments for productivity to employees might be variable once a certain level of output is achieved

Question 17

semi-variable costs

Answer 17

cost which contains both fixed and variable components and so is partly affected by changes in the level of activity

Question 18

examples of semi-variable costs (FC + VC)

Answer 18

• electricity + gas bills (standing charge, charge per unit of electricity used)
• salesman’s salary (basic salary, commission on sales made)
• cost of running a car (road tax/insurance, petrol/oil/repairs varying with km travelled)

Question 19

graph of semi-variable cost (total + per unit)

Answer 19

fixed part raises starting point
then like a normal VC graph from starting point of y axis

per uni is just fixed cost per unit graph

Question 20

Limitations of high-low method

Answer 20

Only estimates the cost, actual cost might differ
Assume each unit of material cost the same
Uses the most extreme figures observed
Assume cost rates in the future will be the same as in the past

Question 21

Can fixed cost turns into stepped-fixed cost ?

Answer 21

YES

Over the long term, with wide range of activity, fixed cost may behave as stepped-fixed.

Question 22

Can stepped-fixed cost turn into variable cost?

Answer 22

YES

Etc : Over time, as output increases, rent also increases, step by step, exhibiting variable behaviour

Question 23

Formula for ROCE/ROI

Answer 23

= PBIT @Operating profit / Capital employed

Question 24

Capital employed

Answer 24

Non-Current Liabilities + Total equity

@

Total asset - Current liabilities

Question 25

Formula for asset turnover

Answer 25

Sales / Capital employed

Question 26

Profit before interest & taxes is AKA ….

Answer 26

Operating profit AKA Net profit

Question 27

Capped charges have a maximum limit on the cost incurred.

Answer 27

e.g. public transport card, where the total cost of trips is up to the maximum day rate; no further charges are incurred for additional trips. graph of volume of activity- maximum cost will look like / then -----

Question 28

Minimum charges have a minimum cost that must be incurred. The cost will remain constant until a threshold activity is reached, after which it behaves as a variable cost.

Answer 28

graph of volume of activity- minimum cost----- then increases /

Question 29

volume discount graphs:

Answer 29

discount is given upon reaching a certain activity threshold (units purchased), reducing the cost per unit on all units purchased Any additional units purchased will be at the discounted rate / then straight line down, then / again jagged (steeper then shallower gradient)

Question 30

When labour is scarce, employees may be required to work additional hours. These extra hours may be paid at a higher (overtime) rate.

Answer 30

total labour cost will show a higher gradient for hours exceeding regular hours. shallower then steeper gradient