Management Accounting 28.09.20
Cost estimation
Cost behaviour
o Cost behaviour: how do costs change as the activity level changes
o Managers use this information when making operational decisions (how much to
produce)
o Cost estimation: have a cost driver (cause of the cost) which is likely to influence the
cost
o Important to estimate costs using the cost drivers
o Cost prediction: change level of activity and see the change in the forecasted total cost
- A forecast of a cost at a particular level of activity
Variable costs
o Total Variable costs change in direct proportion to a change in activity
o Variable cost per unit is likely to remain constant
, Management Accounting 28.09.20
Variable costs per unit
o Semi-variable costs: cost doesn’t increase for every unit used (E.G. bolts) has fixed
and variable component (Truck delivery – rental FC and petrol VC)
o Semi-fixed costs: increase in increments (rent)
, Management Accounting 28.09.20
- Merchandiser variable costs because it is dependent upon volume
- Merchandisers: sales volume or quantity ordered by customers
Step Variable costs
o Total cost remains constant within a narrow range of activity
o Change in small steps instead of continuously
o Part time workers, bolts, nursing costs (patient days)
o Increases in steps as activity increases
o Total cost increases to a new higher cost (step) for the next higher level (step) of activity
Cost estimation
Cost behaviour
o Cost behaviour: how do costs change as the activity level changes
o Managers use this information when making operational decisions (how much to
produce)
o Cost estimation: have a cost driver (cause of the cost) which is likely to influence the
cost
o Important to estimate costs using the cost drivers
o Cost prediction: change level of activity and see the change in the forecasted total cost
- A forecast of a cost at a particular level of activity
Variable costs
o Total Variable costs change in direct proportion to a change in activity
o Variable cost per unit is likely to remain constant
, Management Accounting 28.09.20
Variable costs per unit
o Semi-variable costs: cost doesn’t increase for every unit used (E.G. bolts) has fixed
and variable component (Truck delivery – rental FC and petrol VC)
o Semi-fixed costs: increase in increments (rent)
, Management Accounting 28.09.20
- Merchandiser variable costs because it is dependent upon volume
- Merchandisers: sales volume or quantity ordered by customers
Step Variable costs
o Total cost remains constant within a narrow range of activity
o Change in small steps instead of continuously
o Part time workers, bolts, nursing costs (patient days)
o Increases in steps as activity increases
o Total cost increases to a new higher cost (step) for the next higher level (step) of activity
