Cost behaviour & effect of changing activity levels on

unit costs

Objectives:

1. Correctly identify types of cost behaviour2. Explain the effect of changing activity levels on unit

costs3. Correctly calculate the effect of changing activity

levels on unit costs4. Accurately calculate contribution at different levels

of activity5. Correctly calculate profits or losses at different

activity levels6. 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 ActivityC

Fixed Cost

Graphs Activity

D

Semi-variable Cost

Graphs Activity

E

Variable Cost

Activity 1A 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.

10000 10000 10000

12000 240000 480000

22000 250000 490000

22.00 12.50 12.25

Activity 2

Variable

Variable

Fixed

Semi Variable

Fixed

In pairs discuss the table and identify the cost

behaviour

Water (Activity 2)Units Cost

Highest 300 160.00Lowest 100 120.00

200 40.00 so 0.20p

What do we know about fixed and variable costs?

If a cost is made up of fixed and variable and the total costs go up which cost will have changed?

100 units total cost for water is £120.00. Deduct the VC of £20.00 (20p per unit) = Fixed cost of £100.00To check:200 units total cost for water is £140.00. Deduct the VC of £40 (20p per unit) = Fixed Cost of £100.00

Variable Element

Activity 3 - Premier LabelsHandout

Activity 4 - Turbo Motor Factors

80,000 cars = £325,00060,000 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 = £312,000Fixed Costs £325,000 - £312,000 = £13,000

60,000 cars = £247,000

Variable Costs 60,000 x £3.90 = £234000Fixed Costs £247000 - £234000 = £13000

Activity 4c: Turbo Motor Factors

65,000 carsVariable Costs 65,000 x £3.90 = £253,500Fixed Costs = £13,000Total Costs £266,500

Variable Cost = £3.90 per unitFixed Costs = £13,000

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’

Example: Increase in costs after a decision to increase production

Sometimes described as avoidable

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’

Example: Fixed Costs

Unavoidable

Specific Examples?

Activity 7: Fly for Less Plc

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 - Lindsey Turnera. 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 252.00

+ Fixed costs 20.00

Total Costs 272.00

Marginal CostingUnit costs only includes Variable

Costs(i.e. the cost of increasing production by ONE unit)Variable Costs are Direct costs –

Materials/Labour/Expenses

These will change as a result of decisions being

made

What kind of decisions will affect these costs?

• 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 onlySelling price minus Variable costs = CONTRIBUTION to fixed cost & profit

Question 6b: Lindsey Turner

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 - Smokey Manufacturing LtdActivity 10 - Elizabeth Rex LtdActivity 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 valueValue if put to

alternative use

Homework

Complete all remaining activities – checking your answers on the Wiki