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  • Chapter 3

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    Myo Thu
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    This document discusses different types of cost behavior including fixed costs, variable costs, step costs, and semi-variable/mixed costs. It provides examples of how total costs, variable costs, fixed costs, and total cost per unit change as production volume increases from 1 unit to 50 units. The key points are: - Variable costs remain constant per unit but increase total as production increases - Fixed costs per unit decrease as production increases, while total fixed costs remain the same - Total cost per unit decreases as production volume increases

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    This document discusses different types of cost behavior including fixed costs, variable costs, step costs, and semi-variable/mixed costs. It provides examples of how total costs, variable costs, fixed costs, and total cost per unit change as production volume increases from 1 unit to 50 units. The key points are: - Variable costs remain constant per unit but increase total as production increases - Fixed costs per unit decrease as production increases, while total fixed costs remain the same - Total cost per unit decreases as production volume increases

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    © All Rights Reserved
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    2 views2 pages

    Chapter 3

    Uploaded by

    Myo Thu
    This document discusses different types of cost behavior including fixed costs, variable costs, step costs, and semi-variable/mixed costs. It provides examples of how total costs, variable costs, fixed costs, and total cost per unit change as production volume increases from 1 unit to 50 units. The key points are: - Variable costs remain constant per unit but increase total as production increases - Fixed costs per unit decrease as production increases, while total fixed costs remain the same - Total cost per unit decreases as production volume increases

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    © All Rights Reserved
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    of 2

    Chapter – 3

    Cost behavior
    Cost behavior pattern
    ▪ A fixed cost is a cost which is incurred for a particular period of time and which, within certain activity levels, is
    unaffected by changes in the level of activity.
    ▪ A variable cost is a cost which tends to vary with the level of activity.
    ▪ A step cost is a cost which is fixed in nature but only within certain levels of activity.
    ▪ A semi-variable/semi-fixed/mixed cost is a cost which contains both fixed and variable components and so is
    partly affected by changes in the level of activity.

    Cost behaviour and cost per unit


    The following table relates to different levels of production of the zed. The variable cost of producing a zed is $5. Fixed
    costs are $5,000.
    1 zed 10 zeds 50 zeds
    $ $ $
    Total variable cost 5 50 250

    Variable cost per unit 5 5 5

    Total fixed cost 5,000 5,000 5,000

    Fixed cost per unit 5,000 500 100

    Total cost (fixed and variable) 5,005 5,050 5,250

    Total cost per unit 5,005 505 105

    What happens when activity levels rise can be summarised as follows.


    • The variable cost per unit remains constant.
    • The fixed cost per unit falls.
    • The total cost per unit falls.

    Question
    Are the following likely to be fixed, variable or mixed costs?
    (a) Telephone bill
    (b) Annual salary of the chief accountant
    (c) The management accountant's annual membership fee to ACCA (paid by the company)
    (d) Cost of materials used to pack 20 units of product X into a box
    (e) Wages of warehousemen

    Answer
    (a) Mixed
    (b) Fixed
    (c) Fixed
    (d) Variable
    (e) Variable

    Question -1
    DG Co has recorded the following total costs during the last five years.
    Year Output volume Total cost
    Units $
    2000 65,000 145,000
    2001 80,000 162,000
    2002 90,000 170,000
    2003 60,000 140,000
    2004 75,000 160,000

    Required
    Calculate the total cost that should be expected in 2005 if output is 85,000 units.

    Question -2
    The following data relate to the overhead expenditure of contract cleaners (for industrial cleaning) at two activity
    levels.
    Square metres cleaned 12,750 15,100

    Overheads $73,950 $83,585

    When more than 14,000 square metres are industrially cleaned, there will be a step up in fixed costs of $4,700.
    Required
    Calculate the estimated total cost if 14,500 square metres are to be industrially cleaned.

    Question -3
    An organization has the following total costs at three activity levels;
    Activity level (units) 8,000 12,000 15,000

    Total cost $204,000 $250,000 $274,000

    Variable cost per unit is constant within this activity range and there is a step up of 10% in the total fixed costs when
    the activity level exceeds 11,000 units.
    What is the total at an activity level of 10,000 units?

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