Cost Behaviour: Outcomes

CHAPTER 19
COST BEHAVIOUR
19.1 Introduction
It is necessary to be aware of how costs behave when activity levels change. Cost
behaviour is the way that cost changes in relationship to changes in the levels of
activity usage (production volume/units). The question is, what will the effect on
costs be if production or service levels change? For example, a manager may want
to determine the impact on the cost of material if the production volume increases
by 15%. As a particular activity level changes, some costs related to this activity
may change in direct relationship to the change while others remain relatively
constant. A manager should be aware of the behaviour of these costs, which will
come in handy when compiling the annual budget.
Students should not get confused with the term ‘cost behaviour and assets’. Cost
behaviour has nothing to do with assets. Non-current assets are further sub-
divided into fixed assets, financial assets and intangible assets. Non-current assets
have nothing to do with cost behaviour. For the definition of fixed assets and non-
current assets, refer to chapter 8.
Outcomes
You should be able to:
 Understand the term ‛cost behaviour’
 Classify any given cost as:
– Fixed cost
– Semi-fixed cost
– Variable cost
– Semi-variable cost
 Give the definition of all the different ways in which a cost can behave
 Draw a graph and give examples of all the different ways in which a cost can
behave.
Copyright © 2018. Juta & Company, Limited. All rights reserved.
19.2 Cost behaviour

Cost behaviour refers to the way in which cost responds to a change in production
volume. In other words, what will the effect on the cost be if there is a change in
production volume? For example, what will the effect on rent and direct material
costs be if production volume increases from 2 000 units to 3 000 units?
From a behavioural point of view, all costs can be broadly divided into:
 Fixed costs
 Variable costs.
Fixed costs can then be subdivided into:
 Fixed costs
 Semi-fixed costs.
Schutte, Madri. Accounting for All, Juta & Company, Limited, 2018. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/ujlink-ebooks/detail.action?docID=6483479.
Created from ujlink-ebooks on 2023-02-28 02:27:04.
Chapter 19 Cost behaviour
Variable costs can be subdivided into:

 Variable – direct proportional
 Variable – progressive change
 Variable – degressive change
 Semi-variable.
If we summarise all types of cost behaviour in a diagram, the diagram will look
like this:
Cost behaviour
Fixed costs Variable costs
Fixed Semi-fixed Variable costs Semi-variable

costs
Direct proportional Degressive Progressive

change change change
19.3 Fixed costs

As discussed, fixed costs can be subdivided as follows:
Fixed costs
Fixed Semi-fixed
19.3.1 Fixed manufacturing costs

Fixed manufacturing costs are costs that remain constant in total for a specific
period regardless of any change in the production volume or output during that
period, unless influenced by some external factors such as price changes. In other
words, the cost stays the same, regardless of any change in volume.
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Factory rent is a good example of a fixed manufacturing cost because it remains

the same regardless of the number of units manufactured during the year.
Although manufacturing fixed costs are fixed in total, the manufacturing fixed
cost per unit decreases as the number of units increases, and increases as the
number of units decreases.
Example 19.1
You are provided with the following figures by Johanna Ltd:
Production units 0 6 000 12 000 18 000 24 000

Factory rent per month R12 000 R12 000 R12 000 R12 000 R12 000
Cost per unit N/A R2 R1 R0.67 R0.50
Required:
Plot the above cost behaviour on a graph.
Solution:
Total fixed costs.
Total factory rent
R16 000
Total R12 000
cost
R 8 000 fixed costs
R 4 000
0 6 000 12 000 18 000 24 000
Production units
Notice that the total cost of renting remains at R12 000 per annum within the 0 to
24 000-unit range. The total does not vary but the cost per unit decreases as the
production volume increases.
The fixed-cost relationship is only valid for a certain capacity level and time
period. The capacity level is bound between minimum and maximum production
levels, termed the relevant range. Fixed costs will remain the same within a
specific time period, within the relevant range.
Should the manufacturing capacity increase beyond the outer limit of the relevant
range, the total fixed overheads will increase. In the example, it might be
necessary to rent additional factory space if the production units exceed 24 000, in
other words the fixed cost will increase if the relevant range of 24 000 is
exceeded.
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19.3.2 Semi-fixed manufacturing costs

Semi-fixed manufacturing costs (step-fixed costs) are costs that respond to
increases above or decreases below the present capacity level (relevant range).
Semi-fixed costs stay the same, regardless of any change in production volume,
but only within the relevant range. Fixed overhead costs cannot be expected to be
the same all the time as predicted over some range of activity.
Example 19.2
Gemsbok (Pty) Ltd rents one machine at R20 000 per month to produce 1 000
products per month. If the company gets a contract to supply 2 000 units a month,
it will need to rent an additional machine. Gemsbok’s monthly rent will thus
increase from R20 000 per month to R40 000 per month.
Required:
Plot the above information on a graph.
Solution:
Semi-fixed manufacturing costs.
Renting a machine
Total
Total 40 000 Semi-fixed costs
cost Cost of additional
Cost
(R) capacity
20 000
(R)
Cost of capacity
0 500 1 000 1 500 2 000

Production units
As seen on the graph, the cost stays fixed (R20 000) for 0–1 000 units. Then the
cost changes to R40 000 for 1 001–2 000 units.
19.4 Variable costs

Variable costs can be subdivided as follows:
Variable costs
Variable Semi-variable
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Accounting for All
19.4.1 Variable manufacturing costs

Variable manufacturing costs change with a change in production volume. If the
direct material cost for one unit is R40, the direct material cost for two units will
be R80, for three units R120 and for 500 units, R20 000. This illustrates that the
total variable cost changes as production volume changes.
If production volume increases, costs will increase.
If production volume decreases, total variable costs will decrease.
Variable costs can at a certain level or because of a specific factor, exhibit three
different types of change in behaviour:
Variable costs
Direct proportional Progressive Degressive

change change change
 Direct proportional change

Variable manufacturing costs behaving in a direct proportional manner are costs
that vary in total, in direct proportion to the activity level (production volume).
The cost changes in a directly proportional way to a change in production volume.
The activities in a manufacturing environment are normally expressed as
production units. Variable manufacturing costs have a direct relationship to the
number of units produced, because the unit cost remains constant. However, the
total cost will increase if production units increase and the total cost will decrease
if production units decrease.
Example 19.3
Rebecca Manufacturers provides you with the following direct material
information:

Variable cost per unit R5 R5 R5 R5 R5

Total cost (R) N/A 30 000 60 000 90 000 120 000
Required:
Plot the above information on graphs, illustrating the cost behaviour as follows:
 Total variable cost
 Variable cost per unit.
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Solution:
Variable costs that behave directly proportionally (total variable costs)
Total direct material cost
Total
Total R120 000 ●
cost
Cost R 90 000 ●
(R) R 60 000 ●
R 30 000 ●
Variable costs
0 6 000 12 000 18 000 24 000
Production units
Solution:
Variable costs per unit
Direct material cost per unit
6 Variable cost per unit

Cost
Cost 4
R/u
R/U 2
0 6 000 12 000 18 000 24 000

Production units
The total variable overheads change in direct proportion to units manufactured,

but the variable cost per unit remains constant.
 Variable manufacturing costs that behave progressively

In this instance, the manufacturing overheads behave in direct proportion to
production volume up to a point from where variable cost per unit increases due
to certain factors, for example material wastage because of machines that are
extended beyond their production capacity.
The change of the cost to production volume is ‛supposed’ to be directly
proportional, but a particular factor causes a change in behaviour and the total
cost increases more than the change in production volume. In this instance, the
variable cost per unit increases.
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Example 19.4
Rebecca Manufacturers provides you with the following information, regarding
direct material:

Variable cost per unit R5 R5 R5 R5 R5.20
Total cost (R) N/A 30 000 60 000 90 000 124 800
Required:
Solution:
Variable costs that behave progressively
Total direct material with wastage
Total
Total R120 000
cost
Cost R 90 000
(R) R 60 000
R 30 000
Variable costs
0 6 000 12 000 18 000 24 000
Production units
Another example of progressive change is labour inefficiency.

You can see from the graph that the cost for 24 000 units is supposed to change in
a directly proportional way to R120 000. Instead, because of material wastage, the
cost increases a little bit more than the increase in production volume and the total
cost for 24 000 units is R124 800 and not R120 000.
 Variable manufacturing costs that behave degressively

In this instance, the manufacturing cost behaves in direct proportion to production
volume up to a point where variable cost per unit decreases due to certain factors,
for example there may be a saving in set-up costs if two consecutive production
runs produce the same product.
The change of the cost to production volume is ‛supposed’ to be directly
proportional, but a particular factor causes a change in behaviour and the total
cost increases less than the change in production volume, for example material
savings or an increase in productivity. In this instance, the variable cost per unit
decreases.
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Example 19.5
Rebecca Manufacturers provides you with the following information, regarding
direct material:

Variable cost per unit R5 R5 R5 R5 R4.60
Total cost (R) N/A 30 000 60 000 90 000 110 400
Required:
Solution:
Variable costs that behave degressively
Total direct material with material savings
R120 000
Total
Total R 90 000
cost
Cost R 60 000
(R) R 30 000
Variable costs
0 6 000 12 000 18 000 24 000
Production units
You can see on the graph that the total cost for 24 000 units is not R120 000 as it
should have been in the case of a direct proportional change. The cost changes
less than the change in production volume and the total cost for 24 000 units is
only R110 400 and not R120 000.
19.4.2 Semi-variable manufacturing costs

Semi-variable manufacturing costs, also known as mixed overhead costs, contain
both a variable and a fixed cost element. This can best be illustrated by an
example.
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Example 19.6
A photocopy machine is rented at R2 000 per month plus R0.15 per photocopy
produced. The following table shows the cost for different levels of activity:
Activity levels Fixed costs Variable cost Total variable Total cost
per unit costs
1 2 3 4 5
Units R R R R
(1 × 3) (2 + 4)
1 000 2 000 0.15 150 2 150
2 000 2 000 0.15 300 2 300
3 000 2 000 0.15 450 2 450
4 000 2 000 0.15 600 2 600
5 000 2 000 0.15 750 2 750
Required:
Solution:
Semi-variable costs
Renting a photocopy machine
Total overheads
2 750
Total 2 600
Total
Costs
cost 2 450 Variable
(R)
(R) 2 300 costs

2 150
2 000 Fixed
0 1 000 2 000 3 000 4 000 costs
Production units
The fixed portion of total cost is the R2 000 rent that has to be paid. The variable
part is R0.15 per unit.
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Questions
Question 19.1
Calculate the total cost for 9 000 units if:
Fixed cost = R15 000
Variable cost = R7/u
Question 19.2
The following was taken from A&J Enterprises:
Total production cost = R60 000
Fixed cost = R20 000
Units produced = 4 000 units
Required:
19.2.1 How much is the variable cost per unit, and in total?
19.2.2 Calculate the total production cost for 6 000 units.
Question 19.3
Indicate which of the following will be regarded as fixed and which as variable
costs:
19.3.1 Direct material used.
19.3.2 Rent of the factory.
19.3.3 Direct labour used.
19.3.4 Direct overheads.
19.3.5 Indirect labour.
Question 19.4
Indicate if the following costs are:
 Fixed cost
 Variable cost
 Semi-fixed cost
 Semi-variable cost.
19.4.1 Direct material used.
19.4.2 Telephone.
19.4.3 Renting of a vehicle.
19.4.4 Direct labour.
19.4.5 Rent of storage room.
19.4.6 Indirect material used.
19.4.7 Supervisor salary.
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19.4.8 Rent of factory.

19.4.9 Advertising.
19.4.10 Water and electricity.
Question 19.5
Explain what you understand by the following terms; where applicable give a
graph and an example:
19.5.1 Cost behaviour.
19.5.2 Fixed costs.
19.5.3 Variable costs; direct proportional change.
19.5.4 Progressive variable costs.
19.5.5 Degressive variable costs.
19.5.6 Semi-fixed costs.
19.5.7 Semi-variable costs.
Question 19.6
Zoko Manufacturers provides you with the following figures for electricity use:
Fixed rent = R800 per month

Cost per KW hour use = R2/KwH
Plot the following on a graph and complete the total electricity cost for:
19.6.1 1 000 units produced.
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CHAPTER 19

19.2 Cost behaviour

Variable costs can be subdivided into:

Fixed costs Variable costs

Fixed Semi-fixed Variable costs Semi-variable

Direct proportional Degressive Progressive

19.3 Fixed costs

19.3.1 Fixed manufacturing costs

Factory rent is a good example of a fixed manufacturing cost because it remains

Production units 0 6 000 12 000 18 000 24 000

19.3.2 Semi-fixed manufacturing costs

0 500 1 000 1 500 2 000

19.4 Variable costs

19.4.1 Variable manufacturing costs

Direct proportional Progressive Degressive

 Direct proportional change

Production units 0 6 000 12 000 18 000 24 000

Variable cost per unit R5 R5 R5 R5 R5

Total direct material cost

Direct material cost per unit

6 Variable cost per unit

0 6 000 12 000 18 000 24 000

The total variable overheads change in direct proportion to units manufactured,

 Variable manufacturing costs that behave progressively

Production units 0 6 000 12 000 18 000 24 000

Total direct material with wastage

Another example of progressive change is labour inefficiency.

 Variable manufacturing costs that behave degressively

Production units 0 6 000 12 000 18 000 24 000

Total direct material with material savings

19.4.2 Semi-variable manufacturing costs

Renting a photocopy machine

(R) 2 300 costs

19.4.8 Rent of factory.

Fixed rent = R800 per month

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