FINM6222 LU2
FINM6222 LU2 – Cost classification,
estimation and behaviour
2.1 Introduction
Cost behaviour = involves separating mixed costs into their variable and fixed components
and analysing how costs and revenues react to varying levels of activity.
Cost estimation = measuring past costs to predict future costs so we can make decisions
Cost classification = grouping costs accordingly to common characteristics
- Identity
- Function
- Variability
- Controllability
- Normality
- Time
2.2 Variable, fixed and mixed costs
Variable cost = cost that varies with the
production of output or sales
Fixed cost = costs that remain unchanged
regardless of the volume of production
output or sales revenue
Mixed cost = cost that has both fixed and
variable components
Semi-fixed = costs that are fixed within a
defined level of activity but increase or
decrease when activity reaches upper and
lower levels
Semi-variable = costs that respond less
proportionally to changes in the level of
production output
1
, FINM6222 LU2
2.3 High-low Method
Cost accounting method that used the highest and lowest total costs as a basis for
estimating the fixed and variable elements of a mixed cost
y = a + bx or a = y – bx
y = total cost
x = volume (output)
a = fixed cost
b = variable cost
Example 2.2
The following info has been provided about the lowest and highest levels of output, and the
resulting change in maintenance costs (a mixed cost):
Activity Volume of production (units) Maintenance costs (R)
Lowest output 6 000 26 400
Highest output 12 000 38 400
The variable cost per unit is calculated as follows:
Value
Difference in cost [38 400 – 26 400] 12 000
Difference in activity [12 000 – 6 000] 6 000
Variable cost per unit [12 000] 2.0
Element Value (high input) Value (low input)
Y 38 400 26 400
X 12 000 6 000
B 2.0 2.0
a 14 400 14 400
2
FINM6222 LU2 – Cost classification,
estimation and behaviour
2.1 Introduction
Cost behaviour = involves separating mixed costs into their variable and fixed components
and analysing how costs and revenues react to varying levels of activity.
Cost estimation = measuring past costs to predict future costs so we can make decisions
Cost classification = grouping costs accordingly to common characteristics
- Identity
- Function
- Variability
- Controllability
- Normality
- Time
2.2 Variable, fixed and mixed costs
Variable cost = cost that varies with the
production of output or sales
Fixed cost = costs that remain unchanged
regardless of the volume of production
output or sales revenue
Mixed cost = cost that has both fixed and
variable components
Semi-fixed = costs that are fixed within a
defined level of activity but increase or
decrease when activity reaches upper and
lower levels
Semi-variable = costs that respond less
proportionally to changes in the level of
production output
1
, FINM6222 LU2
2.3 High-low Method
Cost accounting method that used the highest and lowest total costs as a basis for
estimating the fixed and variable elements of a mixed cost
y = a + bx or a = y – bx
y = total cost
x = volume (output)
a = fixed cost
b = variable cost
Example 2.2
The following info has been provided about the lowest and highest levels of output, and the
resulting change in maintenance costs (a mixed cost):
Activity Volume of production (units) Maintenance costs (R)
Lowest output 6 000 26 400
Highest output 12 000 38 400
The variable cost per unit is calculated as follows:
Value
Difference in cost [38 400 – 26 400] 12 000
Difference in activity [12 000 – 6 000] 6 000
Variable cost per unit [12 000] 2.0
Element Value (high input) Value (low input)
Y 38 400 26 400
X 12 000 6 000
B 2.0 2.0
a 14 400 14 400
2
