AAT L2 Costing 04 Behaviour Fixed, Variable & High Low Method

Variable Cost is a cost that changes in proportion to the level of output or activity. (a)  

• True
• False

Fixed cost is a cost that does alter in total when the level of output or activity changes. (a)  

• True
• False

Semi-variable cost, is a cost that contains both a fixed element and a variable element. (a)  

• True
• False

High-low method is:

• the way the costs alter with changes in the level of output or activity.

• a technique for calculating the variable and fixed costs that comprise a semi variable cost by analysing the total costs at two activity levels.

• a technique for calculating the fixed costs that comprise a semi variable cost by analysing the prime costs at two activity levels.

Which statements are true.

• Cost behaviour examines how costs respond to changes in the level of output or activity. Costs can behave in one of several ways, including as fixed costs, variable costs and semi-variable costs.

• An understanding of cost behaviour can be used to enable the calculation of total costs and unit costs using simple arithmetic.

• The high-low method can be used to analyse semi-variable costs at two activity levels splitting out the variable and fixed parts. This information can then be used to calculate the total costs at other activity levels.

• Cost behaviour examines how labour costs respond to changes in the level of output or activity. Costs can behave in several ways, including as fixed costs and semi-variable costs.

• An understanding of cost behaviour can be used to enable the calculation of the maximum profit and unit selling price using simple arithmetic.

Identify fixed costs

• Employee paid basic wage plus commission based on production quantity

• rent of the factory workshop

• print ink used for letterhead and logos

Identify semi-variable costs

• Employee paid basic wage plus commission based on production quantity

• rent of the factory workshop

• print ink used for letterhead and logos

Identify variable costs

• Employee paid basic wage plus commission based on production quantity

• rent of the factory workshop

• print ink used for letterhead and logos

Identify false statements

• many fixed costs are only fixed over a certain range of output

• variable cost per unit falls as output rises

• direct costs are generally variable

• fixed cost per unit rises as output rises

CALCULATE THE FIXED COST PER ITEM:

Munich Ltd makes outdoor gym equipment. It incurs fixed costs of £50,000 per year in relation to the manufacture of its outdoor treadmills. Calculate the fixed cost per treadmill at 25,000 output level.

• fixed cost per treadmill £50

• fixed cost per treadmill £5

• fixed cost per treadmill £2

• fixed cost per treadmill £0.50