This is an aesthetic summary of chapter 3 for FBS222 at the University of Pretoria. I used class notes, lecture slides, past papers and other notes to gather the information. This chapter appears in semester test 2, the sick test, and the exam. I made these notes in 2023 but the module doesn't chan...
D
COST BEHAVIOUR: term for describing if a cost changes when the level of output changes.
D COST DRIVER: a causal factor that measures the output of the activity that leads (or causes)
costs to change e.g. weather is a significant driver in the airline industry.
Identifying and managing drivers helps managers better predict and control costs.
D
RELEVANT RANGE: the range of output over which the assumed cost relationship is valid for
the normal operations of a firm. The relevant range limits the cost relationship to the range
of operations that the firm normally expects to occur.
⑪ Fixed Costs
D
Fixed Costs: costs that don’t change in total as output changes. They’re constant within
the relevant range as the level of output increases or decreases.
e.g. rental payments, insurance, salaries.
D Discretionary fixed costs: fixed costs that can be changed or avoided easily at
management discretion.
e.g. Ads depend on the decision by management to purchase print, radio, or video
advertising. Cost depends on size of the advert or how many times it runs, NOT on
units produced or sold. Easily to increase or decrease the $ spent on advertising.
D
Committed fixed costs: fixed costs that cannot be easily changed and often involve costs
that have a long-term contract (e.g. leasing of machinery or warehouse space) or the
purchase of property, plant, and equipment.
Diagrams help
heading
+
ID
visual
good
, ② Variable Costs
D Variable Costs: costs that increase in total with an increase in output and decrease in total
with a decrease in output. They are costs that vary in direct proportion to change in output
within the relevant range.
e.g. labour, commissions, raw materials, electricity.
Total Variable Costs = Variable rate x Amount of output
Many costs do not fall into the categories of fixed and variable costs but are rather a
combination of fixed and variable costs (mixed costs) or have an increased fixed
component at specified intervals (step costs).
- mix of previous two
③ Mixed Costs
D Mixed Costs/ Semi Variable Costs: costs that have both a fixed and variable component.
e.g. sales representatives are often paid a salary plus a commission on sales
Costs are fixed for a set level of production or consumption and become variable after this
production level is exceeded.
Total Cost = Total Fixed Cost + Total
Variable Cost
Total Cost = Total Fixed Cost + (Variable
Rate x Units of Output)
↳ Even graph is a mix
of two
previous
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