Behaviour of Cost

Example 1
How would you classify the following in terms of direct or indirect materials?
(a) paper used in printing a book
(b) glass used in spectacles
(c) cloth used in making a dress
(d) timber used in constructing a house
(e) staples in a book
(f) water used in making ice-cream
(g) water used in making ice

Example 2
How would you classify the following in terms of (a) prime costs (b) production overhead (c)
administration overhead (d) selling overhead and (e) distribution overhead (f) financial expenses.
(1) Production manager’s salary (7) Repairs to machinery
(2) Depreciation (machinery) (8) Office salaries
(3) Boiler fuel (9) Chief accountant’s salary
(4) Insurance (finished stock) (10) Advertising
(5) Assemblers’ wages (11) Raw materials used
(6) Foremen’s salaries (12) Electric power (Factory)

(13) Hire of computer office (22) Accommodation expenses of salesmen

(14) Delivery expenses (23) Entertainment expenses of salesmen
(15) Bad debts (24) Carriage-inwards on raw materials
(16) Time-keeper’s wages (factory) (25) Royalty per unit of production
(17) Lubricating oil (works) (26) Expenses on factory canteen
(18) Travelling expenses (office) (27) Wages of crane driver in factory
(19) Toilet supplies (office) (28) Wages of crane driver in haulage company
(20) Toilet supplies (works) (29) Wages of office boy in general office
(21) Travelling expenses of salesmen (30) Wages of store clerks

a). Fixed Cost

Def : - These are cost that remain unchanged even when production activity changes over a certain
relevant
range
- Fixed cost is also known as period cost ie: Rental, Insurance, Depreciation, etc.

RM
Unit Fixed Cost (RM) Cost per Unit
0 5000 0
10 5000 500
100 5000 50
1000 5000 5
5000 Fixed Cost

0 10 100 1000 Unit

b).Variable Cost
Def : Cost that changes in direct proportion with production activity.
- when production increases cost increases and vise versa
- ie Direct Material, Direct labour etc

RM Variable
Unit Variable Cost (RM) Cost per Cost
Unit 1000
0 0 0
1 10 10
10 100 10
100 1000 10 100

10
0 Unit
1 10 100

c). Semi Variable or Semi Fixed

Def : Cost that vary with production but not in direct proportion to the volume or unit produced.
ie : Supervisor Salary, telephone bill etc.
Semi-Variable / Step Cost
Production (unit) Semi Variable Cost Cost per RM
Unit
0 1000 0 3000
100 1000 10
101 2000 19.8 2000
150 2000 13.33
201 3000 14.93 1000
250 3000 12
0
High – Low Method 100 200 300 Unit
Def : Segregate total cost or semi-variable cost to fixed and variable cost.

Formula

Variable Cost Difference in Cost

=
per unit Difference in Unit

Example 3
How would you classify the following in terms of fixed, variable or semi-variable costs?
(a) depreciation (straight line method)
(b) depreciation (units of use method)
(c) direct materials
(d) insurance on factory building
(e) direct labour
(f) insurance on plant and machinery
(g) heat, light and power
(h) repairs and maintenance
(i) rent for factory
(j) costs of milk in making ice-cream
(k) supervisor salaries
 Example 4:
Unit produced Total Cost (RM)
1000 RM 5,000
2000 RM 7,000
3000 RM 9,000
4000 RM 11,000
Required
a). Variable cost per unit
b). Segregate total cost to fixed and variable cost

Example 5:
Year 2005 2006
Units 5000 15000
Total Cost RM 50,000 RM 100,000
Ascertain :-
a). Variable Cost per unit
b). Total Variable Cost (i) 2005 (ii) 2006
c). Total Fixed Cost per annum.

Example 6:
Year 2005 2006
Sales RM 80,000 RM 120,000
Total Cost RM 60,000 RM 80,000
Ascertain :-
a). Variable Cost per sales
b). Total Variable Cost (i) 2005 (ii) 2006
c). Total Fixed Cost per annum.

Example 7
Year Hours Total Cost (RM)
2001 5,000 35,000
2002 13,000 59,000
2003 21,000 83,000

Required:
a.) Variable Cost per hour
b.) Total fixed cost per annum.
c.) Total cost at 25,000 hours.

Example 8
Year 2005 2006
Units 5,750 6,250
RM RM
Direct Material 17,250 18,750
Direct Labour 11,500 12,500
Rental 12,000 12,000
Production Overhead 36,750 39,250
Required:
a.) Total Variable Cost per unit with detail listings of cost items.
b.) Total Fixed Cost per annum with detail listing of cost items.
c.) Total cost at 8,000 units activity level.
d.) Give one example of Variable cost, Fixed cost, and Semi-variable from the above.
Example 9
Units 6,000 15,000
RM RM

Direct Material 9,000 22,500

Direct Labour 15,000 37,500
Selling & Administration 5,000 5,000
Indirect Labour 20,000 38,000
Depreciation 3,000 3,000
Indirect Material 20,000 47,000

Required:
a.) Prepare statement for 10,000 units using the similar style of layout as above.
b.) Give one example variable cost, fixed cost and semi-variable cost from the above data.

Example 10
Units 8,000
RM
Sales 200,000
Less :Cost
Direct Material 24,000
Direct Labour 16,000
Indirect Labour 33,000
Rental 10,000
Commission 20,000
Other Cost 45,000
148,000
Profit 52,000

Notes:
i) Selling price per unit RM 25
ii) Direct material and direct labour are variable cost
iii) Rental is a fixed cost
iv) Commission is 10% of sales value
v) Included in indirect labour RM 1,000 is a fixed cost and the remainder of cost vary with production
units
vi) Other cost are as follow:
units Other Cost (RM)
3,000 20,000
5,000 30,000
Required:
Prepare a budget in the same style of layout above, based on 15,000 units activity level.