Page 41 - BA2 Integrated Workbook - Student 2017

Analysing and predicting costs

Identifying cost behaviour

Understanding costs and cost behaviour is important. Managers must
be able to identify if costs are fixed, variable, stepped or semi-variable.
If this cost behaviour is understood then managers are able to estimate
or predict costs going forward.

Consider the following costs for a t-shirt printer:
Number of t-shirts printed 100 200
Material $220 $440

Labour $120 $240
Rent $550 $550
Electricity $250 $300

To determine the behaviour of each cost, consider how the cost changes over the
different activity levels.

Material: Material is $220 for 100 units ($2.20 per unit), and $440 for 200 units,
($2.20 per unit). This suggests that material is a variable cost.

Labour: Labour is $120 for 100 units ($1.20 per unit), and $240 for 200 units, ($1.20
per unit). This suggests that labour is a variable cost.

Rent: The total rent cost is $550 for each level of activity. This suggests that rent is
a fixed cost.

Electricity: Electricity is $250 for 100 units ($2.50 per unit) and $300 for 200 units,
($1.50 per unit). This suggests that electricity is a semi-variable cost.

We have to be able to split semi-variable cost into their fixed and variable
components.

Note: Total cost = Total fixed cost + Total variable cost

(Total variable cost = Variable cost per unit × Number of units)

TYU 1

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