Cost Behaviour - 25%

Question 1

What are the basic principles of cost behaviour ?

Answer 1

As the activity level rises, costs will usually rise. It generally costs more to produce more units.

Question 2

What is the relevant range ?

Answer 2

The activity level within which assumptions about the behaviour of costs remain valid

Question 3

What can the level of activity refer to ?

Answer 3

• the value of items sold
• the number of items sold
• the number of invoices issued
• the number of units of electricity consumed

Question 4

What is a fixed cost ?

Answer 4

A fixed costs tends to be unaffected by an increase or decrease in the level of activity

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Question 5

Give three examples of a fixed cost

Answer 5

• rent of a single factory building
• straight line depreciation of a machine
• salary of a director

Question 6

What it a stepped cost

Answer 6

A stepped cost us a fixed cost in nature but only with certain levels of activity. Stepped costs go up like steps

Question 7

Give two examples of a stepped cost

Answer 7

Supervisors salary costs
Software licence fees

Question 8

What is a variable cost ?

Answer 8

A cost that varies directly with the level of activity

Question 9

Give 3 examples of a variable cost

Answer 9

• Direct material
• Direct labour
• Sales commission

Question 10

What is a semi variable cost ?

Answer 10

This type of costs consists both if fixed and variable elements which is partially effected by changes in the levels of activity

Question 11

Give 2 examples of semi- variable costs

Answer 11

• telephone bills
  ( line rental+call costs )
• Sales mans salary
  (Basic+commission)

Question 12

What are the two methods of finding the fixed and variable elements of semi variable costs

Answer 12

• scattergraph
• high/low method

Question 13

Scatter graph method of splitting semi variable costs

Answer 13

1. Plot costs data from previous periods on a scattergraph
2. Add line of best fit
3. Fixed costs = where line of best fit intersects y ( vertical ) axis
4. Variable costs per unit = total cost - fixed costs / activity level

Question 14

High low method of splitting semi variable costs

Answer 14

1. Select the period with the highest and lowest activity level
2. Deduct the cost of the low activity level from the cost of the high activity level. ( this is the variable cost of the difference in activity level )
3. Calculate the variable cost per unit ( = the difference in variable cost / the difference in activity level.
4. Calculate the fixed cost ( = total cost at either activity level - variable cost for activity level chosen

Question 15

What is the line of best fit formula

Answer 15

Y=a+bx

Question 16

What us the linear regression analysis mathematical calculation

Answer 16

B= n{XY - {X{Y
——————
N{X2- ({x)2

A=—. —
Y - bx

N= nu,ber of Paris of data
—
X = average x value

—
Y = average y valu

Question 17

What is correlation

Answer 17

This is the extent to which the value of a dependent variable is related to the value of the dependable variable

Question 18

What are the 3 degrees of correlation

Answer 18

• perfectly correlated
• partly correlated
• uncorrelated

Question 19

R = +1 = ?

Answer 19

perfectly positive

Question 20

R=-1 +?

Answer 20

Perfectly negative

Question 21

R=0=?

Answer 21

Uncorrelated

Question 22

Refer to notes to memorise the correlation of coefficient formula