Session 6

Accounting - 1

Accounting – Cost behaviour

Definitions
 Variable Cost is a cost which, in total, increases or decreases in direct
proportion to the volume of production or sales.
 Fixed Cost is a cost which, in total, remains constant and is uninfluenced
y changes in the volume of production and/or sales in the short term.
 Semi-variable Cost where a part of the cost acts as a variable cost, and a
part acts as a fixed cost.
 Marginal Costing is the principle whereby only variable costs are charged
to cost units for production or service.

Concepts
High-Low method
 The high-low method helps us to determine whether the costs are
variable, fixed or semi-variable.
1. Establish the total cost levels of a particular item at two levels of activity.
2. Calculate the change in cost which arises due to the change in
production, sometimes known as the differential cost.
3. Calculate the cost per unit arising from the change in cost and the
change in production. Change in cost/Change in production
4. Calculate the total variable costs for each level of production.
5. Subtract the total variable costs from the total costs at each production
level to obtain the total fixed costs at each production level.
Marginal Costing Statement
 Contribution = selling price per unit less variable cost per unit.
 Profit = total contribution less total fixed costs