Cost Classification And Behaviour

Question 1

Cost Behaviour

Answer 1

Responses of cost yo change in circumstances and levels of activity (or production volume)

Question 2

Variable Costs

Answer 2

Change in direction proportion to output of sales level

Assume linearity: cost per unit of output is constant at all levels of sales

Relationship expressed as straight line graph y. Bx

Question 3

Fixed costs

Answer 3

Likely to remain constant over a range of output.
Independent of level of output or decision under consideration. Payable regardless of output produced
Relationship expressed as a horizontal straight line y = a

Question 4

Stepped costs

Answer 4

Associated with input factors which cannot be increased in very small accounts but can be increased only in discrete steps
Cannot be described by a simple algebraic function

Question 5

Semi variable costs

Answer 5

Fixed and variable components
Assume variable element is linear so the semi variable cost expressed
Y = a + bx

Question 6

Cost volume profit (CVP) analysis

Answer 6

A tool for companies to determine how changes in costs and sales volume affect a company’s profit

Question 7

CVP relationship

Answer 7

Profit = total revenue - total costs

π = TR - TC
TR = P - x TC = a + bx

Question 9

Break even point (BEP)

Answer 9

The number of units output to give a profit of zero. I.e when TR = TC
P - x = a + bx
X = a/(P - b)

Question 10

contribution ratio

Answer 10

Contribution / sales revenue x 100%