Page 45 - BA2 Integrated Workbook STUDENT 2018

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: The cost 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: The cost 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)

Illustrations and further practice

Now try TYU 1

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