Professional Documents
Culture Documents
&
COST BEHAVIOUR
Dr. Rana Singh
www.ranasingh.org
COST
DRIVERS
Product
ACTIVITIES
SUITABLE COST
DRIVERS
Materials
Management
Inspection of materials
Stores
Management
Storing of materials
Servicing of requisitions
Number of requisitions
Value of stock
Quality Control
Testing of Samples
Marketing
Demand Creation
Increase in sales
Advertising
Increase in sales
Despatches
Number of orders
ACTIVITIES
SUITABLE COST
DRIVERS
Personnel
Management
Recruitment of
employees
Number of employees
recruited
Maintenance of leave
records & attendance
Number of employees
Research &
Development
Research
Machining
Setup Cost
Power cost
Machine hours
ACTIVITIES-CLASSIFICATION
In manufacturing organizations, activities are
grouped on the basis of different levels at which
activities are performed and hence are identified
and classified into broadly four different
categories:
Unit
Batch
Level
Activities
Level
Activities
Product
Level
Activities
Facility
Level
Activities
EXAMPLES
Examples of costs driven by activities at each level:
ACTIVITY LEVEL
1. Unit Level
2. Batch Level
EXAMPLES
ACTIVITY LEVEL
3. Product Level
Cost of
Cost of
Cost of
Cost of
4. Facility Level
Product Development
Product marketing such as advertising
specialized equipment
maintaining specialized equipment
COST BEHAVIOUR
COST - CLASSIFICATION
FIXED COST
Total Cost
Rs. 1,00,000
80,000
60,000
40,000
20,000
0
0
20
40
Volume (In Thousands)
60
20
40
60
80
100
20
40
60
80
100
EXAMPLE
FIXED COST-CLASSIFICATION
1.
2.
FIXED COST-CLASSIFICATION
3. Discretionary costs: Result from special policy
decisions, management programmes, new
researches etc. Example: R&D Costs, Marketing
Programmes, new system development costs.
4. Step Costs: Constant for a given amount of
output and then increases in a fixed amount
after a higher output level.
In a manufacturing Company:
One supervisor required at a salary of Rs. 10,000 p.m. for every 50
workers.
As soon as 51st worker is employed, cost of supervision increases to
Rs. 20,000
Cost of supervision will go up if more than 100 workers are working.
VARIABLE COST
VARIABLE COST
VARIABLE COST-BEHAVIOUR
Behaviour pattern of direct material cost
Total Direct Material
Cost (Rs.)
300,000
250,000
200,000
150,000
100,000
50,000
0
0
1000
2000
3000
4000
Production Units
5000
6000
Cost
Convex
150,000
100,000
50,000
0
1000
2000
3000
4000
5000
6000
Level of Activity
Cost
Concave
1000
2000
3000
4000
Level of Activity
VARIABLE COSTCURVI
LINEAR ?
In some production process, the amount of
waste materials remain more & more constant
So when production increases, unit variable cost
for material decreases due to economies of scale
On the other hand:
Diminishing returns will operate when it
becomes necessary to pay increasing differential
piece rates to increase production
A form of concave curvilinear relationship will
emerge.
MIXED COST
SEMI-FIXED COSTS
Costs which remain constant upto a certain level
of output after which they become variable.
60,000
50,000
40,000
30,000
20,000
10,000
0
0
1000
5000
6000
SEMI-VARIABLE COSTS
Cost is basically variable but whose slope may
change abruptly when a certain output level is
reached. 30,000
Total Costs (Rs.)
25,000
20,000
15,000
10,000
5,000
0
1000
5000
MIXED COSTS
Total
Mixed
Cost
Units x
variable
cost per
unit
EXAMPLE
1,000
1,500
Fixed Component
Rs. 1,500
Rs. 1,500
Rs 1,500
Total
Rs. 3,000
Rs. 2,500
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