Department of Business Administration

Course Code: BUS-2304 Week: 01

Course Title: Cost & Management Accounting Lecture No: 02
Instructor: Yen Xavier Rozario

Topic: Determining the fixed and variable elements of semi-variable costs

Practice Exercise: (A)

Select the correct words in the following sentences:
1. The basic principle of cost behaviour is that as the level of activity rises, costs will usually
(a) rise/fall/stay the same.
2. In general, as activity levels rise, the variable cost per unit will (b) rise/fall/stay the same,
the fixed cost per unit will (c) rise/fall/stay the same and the total cost per unit will (d)
rise/fall/stay the same.

Practice Exercise: (B)

Show, by means of a sketch, a separate graph of cost behaviour patterns for each of the listed
items of expense. In each case the vertical axis should relate to total cost. Label each horizontal
axis clearly.
(a) Electricity bill: a standing charge for each period plus a charge for each unit of electricity
consumed.
(b) Supervisory labour.
(c) Production bonus, which is payable when output in a period exceeds 10,000 units. The bonus
amounts in total to £20,000 plus £50 per unit for additional output above 10,000 units.
(d) Sales commission, which amounts to 2% of sales turnover.
(e) Machine rental costs of a single item of equipment. The rental agreement is that £10 should
be paid for every machine hour worked each month, subject to a maximum monthly charge of
£480.

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 Department of Business Administration

Determining the fixed and variable elements of semi-variable costs:

Analysing semi-variable costs
The fixed and variable elements of semi-variable costs can be determined by the high-low
method or the scatter graph method.

High-low method
(a) Records of costs in previous periods are reviewed and the two periods with the highest and
lowest volumes of activity selected.
(b) The difference between the total cost of these two periods will be the variable cost of the
difference in activity levels (since the same fixed cost is included in each total cost).
(c) The variable cost per unit may be calculated from this (difference in total costs ÷ difference in
activity levels), and the fixed cost may then be determined by substitution.

Example: the high-low method

The costs of operating the maintenance department of a computer manufacturer, Bread and
Butter Ltd, for the last four months have been as follows.

Required:
Calculate the costs that should be expected in month five when output is expected to be 7,500
units. Ignore inflation.

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 Department of Business Administration

Practice Exercise: C

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 Department of Business Administration

Solution:

Practice Exercise: D
The cost of running the business for the last 3 months have been as follow.
Month Cost $ Production Volume in Units
1 167,655.00 690
2 177,605.00 790
3 187,555.00 890

Required: Calculate the costs that should be expected in month four when it is expected that the
output would be 990 units.