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7/26/2019 Chapter 4 Cost Behaviour
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Chapter 4Cost Behaviour
Ibrahim Sameer (MBA - Specialized in Finance,B.Com Specialized in Accounting & Marketing)
www.ibrahimsameer.wordpress.com
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Introduction to Cost Behaviour
Cost behaviour is the way in which costs are
affected by changes in the volume of output.
The basic principle of cost behaviour is that as thelevel of activity rises, costs will usually rise. It
will cost more to produce 2,000 unit of output than
it will cost to produce 1,000 units.
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Cost Behaviour Pattern
Fixed cost
A fixed cost is a cost which tends to be unaffected
by increases or decreases in the volume of output.
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Cost Behaviour Pattern
Examples of fixed cost include:
The salary of the MD (per month or per annum)
The rent of a single factory building (per month or
per annum)
Straight line depreciation of a single machine
(per month or per annum)
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Cost Behaviour Pattern
Step cost
A step cost is a cost which is fixed in nature but
only within certain level of activity.
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Cost Behaviour Pattern
Examples of step cost include:
Basic pay of employees is nowadays usually
fixed, but as output rises, more employees arerequired.
Royalties
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Cost Behaviour Pattern
Variable cost
A variable cost is a cost which tends to vary
directly with the volume of output. The variablecost per unit is the same amount for each unit
produced.
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Cost Behaviour Pattern
Non linear or curvilinear Variable cost
If the relationship between total variable cost and
volume of output can be shown as a curved lineon a graph, the relationship is said to be
curvilinear.
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Cost Behaviour Pattern
Semi Variable cost
A semi-variable/semi-fixed/mixed cost is a cost
which contains both fixed and variablecomponents and so is partly affected by changes
in the level of activity.
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Cost Behaviour Pattern
Examples of these costs include the following:
Electricity and gas bill
FC = standing charges
VC = charge per unit of electricity used
Cost of running car
FC = road tax, insurance
VC = petrol, oil, repair
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Cost Behaviour Pattern
Cost behaviour and cost per unit
The following tables relates to different level of
production of the zed. The variable cost ofproducing a zed is $5. Fixed costs are $5,000.
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Cost Behaviour Pattern
What happen when activity level rise can be
summarised as follows:
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Cost Behaviour Pattern
The variable cost per unit remain constant.
The fixed cost per unit falls
The total cost per unit falls
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Determining the fixed & variable
elements of semi-variable cost
The fixed & variable elements of semi variable
cost can be determined by the high low method.
Steps in high low method are as follows:
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Determining the fixed & variable
elements of semi-variable cost
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Linear Equation
A linear equation is a straight line and has thegeneral form
y = a + bx
where y = is the dependent variable
x = is the independent variable
a = is a constant, that is fixed amount
b = is also constant, being coefficient of x
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Questions & Answers
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Thank You
Ibrahim SameerSeek knowledge from cradle to grave