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Don't let this confuse you – total fixed costs are fixed and do not vary with activity levels. 2 Variable costs FAST FORWARD Key term Variable costs increase or decrease with the level of activity. A variable cost is a 'cost that varies with a measure of activity'. CIMA Official Terminology We discussed variable costs briefly in Chapter 1. A variable cost is a cost which tends to vary directly with the volume of output. The variable cost per unit is the same amount for each unit produced whereas total variable cost increases as volume of output increases.

In each case the vertical axis relates to total cost, the horizontal axis to activity level. 40 (a) Electricity bill: a standing charge for each period plus a charge for each unit of electricity consumed. (b) Supervisory labour. (c) Production bonus, which is payable when output in a period exceeds 10,000 units. The bonus amounts in total to $20,000 plus $50 per unit for additional output above 10,000 units. (d) Sales commission, which amounts to 2% of sales revenue. (e) Machine rental costs of a single item of equipment.

Total expenditure may therefore be analysed as follows. Materials cost + = Labour cost = + + + 12 Direct materials cost Direct labour cost Indirect materials cost + + + Indirect labour cost + Expenses = Direct expenses + Indirect expenses Total cost = Direct cost/prime cost + Overhead cost 1: Introduction to management accounting and costing ⏐ Part A Cost determination and behaviour Question Prime costs Which of the following costs would be charged to the product as a prime cost? A B C D Component parts Part-finished work Primary packing materials Supervisor wages Answer A, B and C A, B and C are all examples of direct material costs.

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