Cost behaviour & effect of
changing activity levels on
unit costs
Objectives:
1. Correctly identify types of cost behaviour
2. Explain the effect of changing activity levels on unit
costs
3. Correctly calculate the effect of changing activity
levels on unit costs
4. Accurately calculate contribution at different levels of
activity
5. Correctly calculate profits or losses at different
activity levels
6. Prepare accurate revised forecast profit statements
having adjusted either cost or revenue figures
Revision of Cost Behaviour
INDIVIDUALLY study the graphs on
the wall and decide the cost behaviour
for each one.
List your answers ready to discuss
Graphs Activity
A
Variable Cost
Graphs Activity
B
Fixed Cost
Graphs Activity
C
Fixed Cost
Graphs Activity
D
Semi-variable Cost
Graphs Activity
E
Variable Cost
Activity 1
A business produces widgets. Fixed costs are £10000
and Direct materials per widget are £4, Direct labour
per widget are £8. There are no semi-variable costs.
12000
240000
480000
10000
22000
22.00
10000
250000
10000
12.50
490000
12.25
Activity 2
Variable
In pairs discuss the table and Variable
Fixed
identify the cost behaviour
Semi Variable
Fixed
If a cost is made up of fixed and variable and the
What do we know about fixed and variable costs?
total costs go up which cost will have changed?
Water (Activity 2)
Units
Cost
Highest 300
160.00
Lowest 100
120.00
200
40.00 so 0.20p
Variable
Element
100 units total cost for water is £120.00. Deduct the
VC of £20.00 (20p per unit) = Fixed cost of £100.00
To check:
200 units total cost for water is £140.00. Deduct the
VC of £40 (20p per unit) = Fixed Cost of £100.00
Activity 3
Handout
Activity 4 - Turbo Motor Factors
80,000 cars = £325,000
60,000 cars = £247,000
20,000
£78,000
This represents the
difference in
VARIABLE costs
£78,000 ÷ 20,000 = £3.90 per unit
Activity 4 - Turbo Motor Factors
80,000 cars = £325,000
Variable Costs 80,000 x £3.90 = £312,000
Fixed Costs £325,000 - £312,000 = £13,000
60,000 cars = £247,000
Variable Costs 60,000 x £3.90 = £234000
Fixed Costs £247000 - £234000 = £13000
Activity 4c: Turbo Motor Factors
Variable Cost = £3.90 per unit
Fixed Costs = £13,000
65,000 cars
Variable Costs 65,000 x £3.90 = £253,500
Fixed Costs
= £13,000
Total Costs
£266,500
Complete Activity 5 & 6
Relevant Costs
‘A future incremental cash flow arising
as a direct consequence of a decision’
‘Those costs which are changed by a
decision’ Sometimes described as avoidable
Example: Increase in costs after a
decision to increase production
Specific Examples?
Irrelevant Costs
‘Cost incurred in the past which are
irrelevant to any decision being made
now – including committed costs.
‘Those costs which are not affected by
a decision’
Unavoidable
Example: Fixed Costs
Specific Examples?
Activity 7
In pairs read through the WHOLE
question.
What are the key
words/phrases/numbers?
Handout
Absorption Costing Revision
‘Method of finding an appropriate
amount of overhead per cost unit so
the total cost of producing a product or
job can be found’
‘Sharing the overheads between the
units made’
Examples of methods of absorption?
Machine Hour
Labour Hour
Marginal Costing
‘Separates Variable and Fixed costs’
Sales revenue less Variable costs
=
Contribution to Fixed Costs
Activity 8
a. Calculate the total cost of making a
week’s supply of beef sandwiches
Variable cost per sandwich
1.05
X number of sandwiches
240
Total Variable Costs
+ Fixed costs
252.00
Total Costs
272.00
20.00
Marginal Costing
Unit costs only includes Variable Costs
(i.e. the cost of increasing production
by ONE unit)
Variable Costs are Direct costs – Materials/Labour/Expenses
What kind of decisions will affect
these costs?
•
•
•
•
•
These will change as a
result of decisions being
made
Make or buy?
Start/Stop production of a particular product
Open/Close function in the business
If resources are limited – which products to make
Level of activity to break even
Marginal Costing – How it works …
Costs allocated to a unit are VARIABLE only
Selling price minus Variable costs =
CONTRIBUTION to fixed cost & profit
Activity 6b
What is the marginal cost of a beef sandwich?
Variable cost per sandwich
1.05
What is her profit for a week if she makes and sells all her
sandwiches each week?
£2.00
£1.05
£0.95
240
£228.00
20.00
£208.00
Now it’s your turn!
Activity 9
Activity 10
Activity 11
Relevant costs of materials
On-going purchase of materials for use
in production
Valuing the use of surplus material is
the higher of:
Current resale value
Value if put to
alternative use
Homework
Complete all remaining activities –
checking your answers on the Wiki