1. Cost behaviour & effect of changing activity levels on unit costs

2. 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

3. 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

4. Graphs Activity A Variable Cost

5. Graphs Activity B Fixed Cost

6. Graphs Activity C Fixed Cost

7. Graphs Activity D Semi-variable Cost

8. Graphs Activity E Variable Cost

9. 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. 10000 12000 240000480000 22000 250000 490000 22.00 12.50 12.25

10. Activity 2 Variable Fixed Semi Variable Fixed In pairs discuss the table and identify the cost behaviour

11. Water (Activity 2) UnitsCost Highest300160.00 Lowest100120.00 20040.00 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 £100.00 To check: 200 units total cost for water is £140.00. Deduct the VC of £40 (20p per unit) = Fixed Cost of £100.00 Variable Element

12. Activity 3 - Premier Labels Handout

13. 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

14. 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

15. Activity 4c: Turbo Motor Factors 65,000 cars Variable Costs 65,000 x £3.90 = £253,500 Fixed Costs = £13,000 Total Costs £266,500 Variable Cost = £3.90 per unit Fixed Costs = £13,000

16. Complete Activity 5 & 6

17. 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?

18. 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?

19. Activity 7: Fly for Less Plc In pairs read through the WHOLE question. What are the key words/phrases/numbers? Handout

20. 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 HourLabour Hour

21. Marginal Costing ‘Separates Variable and Fixed costs’ Sales revenue less Variable costs = Contribution to Fixed Costs

22. Activity 8 - Lindsey Turner 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 252.00 + Fixed costs 20.00 Total Costs 272.00

23. 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 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

24. Marginal Costing – How it works … Costs allocated to a unit are VARIABLE only Selling price minus Variable costs = CONTRIBUTION to fixed cost & profit

25. 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

26. Now it’s your turn! Activity 9 - Smokey Manufacturing Ltd Activity 10 - Elizabeth Rex Ltd Activity 11

27. 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

28. Homework Complete all remaining activities – checking your answers on the Wiki