Managment accounting - fixed costs. behaviour of costs and semi-variable costs PDF

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Fixed Costs

A fixed cost is one, which is not affected by changes in the level of activity, over a defined period Examples of fixed costs are: Ø Ø Ø Ø Ø Ø Ø

Rent of buildings Supervisor salaries Advertising in the trade journals Insurance costs Business rates paid to the local authority. Leasing charges for cars used by the sales force. Depreciation of machinery/equipment calculated on the straight-line basis

Example: Output (number of vases) Total Costs (£s) Unit Cost

100

200

300

3,000 3,000/100 = 30

3,000 3,000/200=15

3,000 3,000/300=10

Ø Total cost remains fixed at £3,000. Ø Unit cost is decreasing as output increases, because the fixed cost is spread over more vases - £30 per unit, £15 per unit, £10 per unit

Fixed costs are fixed in total but the cost per unit decreases as volume increases 3000/100=£30 3000/200=£15 3000/300=£10

Behaviour of Cost (within the relevant range) Cost 2400 2300 Vari 2200 2100 2000 1900 Fix1800 0

In Total

Per Unit Variable cost per unit remains the same over wide ranges of activity.

100 200 300 400 activity level changes.

Fixed cost per unit goes down as activity level goes up.

Semi-variable costs: A semi-variable cost is one which is partly fixed and partly variable Examples: • • •

Office salaries where there is a core of long-term staff plus employment of temporary staff when activity levels rise Maintenance charges where there is a fixed basic charge per year plus a variable element depending on the amount of call-outs per year Staff paid salaries plus commission

Example: Activity (number of calls) Cost (£s)

100

200

300

2100

2200

2300

Fixed costs of £2,000 plus variable cost of £1 per unit of output

Examples of semi-variable cost are: • Office salaries where there is a core of long-term secretarial staff plus employment of temporary staff when activity levels rise. •

Maintenance charges where there is a fixed basic charge per year plus a variable element depending on the number of call-outs per year....