1. F2:Management Accounting

2. Designed to give you knowledge and application of: Section B: Cost classification, Behavior & Purpose B1. Production & Non-production costs B2. Direct & Indirect costs B3. Fixed & variable costs B1. Production & Non-production costs B2. Direct & Indirect costs B3. Fixed & variable costs

3. Learning outcomes B3: Fixed & variable cost  Describe and illustrate graphically, the different types of cost behavior  Use high / low analysis to separate the fixed and variable elements of total costs including situations involving stepped fixed costs and changes in the variable cost per unit  Describe and illustrate graphically, the different types of cost behavior  Use high / low analysis to separate the fixed and variable elements of total costs including situations involving stepped fixed costs and changes in the variable cost per unit

4. Different types of cost behaviour Fixed cost is also known as “period cost or “stand-by cost” When Peter sells 1,000 units per unit fixed cost is $1 When Peter sells 100 units per unit fixed cost is $10 Peter is a retailer who pays a rent of $1,000 per month  Per unit fixed cost decreases as production volume increases  Per unit fixed cost increases as production volume decreases Peter pays $1,000 per month whether he sells 1,000 units or 100 units Fixed costs do not vary in total Rent is fixed cost Fixed cost is a cost that remains constant in total, within the current budget period, irrespective of changes in the volume of activity.

5. 0 Total Cost ($) Activity Level (Units) Fixed cost line Fixed costs do not vary in total Fixed costs do not change with the level of activity X Y Fixed cost graph

6. 0 Cost per unit ($) Activity Level (Units) Fixed cost per unit X Y Per unit fixed cost decreases as production volume increases Per unit fixed cost increases as production volume decreases Fixed cost per unit

7. Stepped fixed cost / semi-fixed cost But changes by a constant amount at a certain level of activity or a certain point of time Cost that is fixed for any level of activity during a period Period of time Stepped up fixed cost 0 Interest on borrowings ($) Activity Level X Y Step up of fixed cost due to increase in interest rate within the period Refer to Example on page B3.5

8. Variable cost Variable cost is the portion of total cost that varies with a change in the volume of activity E.g. Direct material cost Direct expenses Direct labour cost

9. Peter Manufactures clocks One clock costs $10 Two clocks cost $10 x 2 = $20 Variable cost increases with increase in activity Variable per unit cost remains constant Each clock costs $20 / 2 = $10 Variable cost

10. 0 Cost / unit ($) Activity Level (Units) Variable cost per unit Variable cost per unit remains same at different levels of activity X Y

11. 0 Total Cost ($) Activity Level (Units) Variable cost Total variable cost increases as activity levels increase X Y Total (Linear) variable cost Refer to Example on page B3.6

12. Non-linear OR Curvilinear OR semi-variable cost Costs which behave like a variable costs but change disproportionately with a change in output, are called non-linear variable costs When the variable cost per unit falls with the increase in the volume of activity When the variable cost per unit increases with the increase in the volume of activity Variable cost 0 Total Cost ($) Activity Level (Units) X Y e. g. volume discounts 0 Total Cost ($) Variable cost X Y Activity Level (Units) e. g. overtime payments

13. A semi-fixed cost is a cost composed of a mixture of fixed and variable components. Also known as a mixed cost. Example : telephone charges  Monthly rental (fixed element)  Number of calls made each month (variable element) Semi-fixed cost = Fixed cost + variable cost Variable cost Fixed cost 0 Total Cost ($) Activity Level X Y Mixed cost Semi fixed cost

14. Fixed element of the total cost remains unchanged during different levels of activity. Hence changes in the total costs at two different levels of activity can be attributed solely to the variable elements. Total cost FC VC Total cost FC VC Activity level 1 Activity level 2 Fixed cost remains unchanged during different activity levels Change in total cost = change in variable cost High & Low analysis to separate fixed & variable cost components of total cost

15. Total cost (at highest / lowest level of activity) – (Total units (at highest / lowest level) x Variable cost per unit (as calculated above) Fixed cost = Variable cost = Difference in cost at different volumes of production Difference in volume High & Low analysis to separate fixed & variable cost components of total cost Refer to Example on page B3.14

16.  Describe and illustrate, graphically, the different types of cost behaviour?  Explain high / low analysis to separate the fixed and variable elements of total costs? RECAP