Question Tag: Cost behavior

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  • 1 Marks

MI – May 2016 – L1 – SA – Q4 – Cost-Volume-Profit (CVP) Analysis

Identify the conditions under which total contributions equal units sold multiplied by contribution per unit.

The formula which states that total contributions equal units of sales multiplied by contribution per unit is correct if the selling price:

A. And fixed cost are constant
B. And variable cost are constant
C. Varies and variable cost is constant
D. Varies and fixed cost is constant
E. And variable cost vary

Answer: B

Explanation:

The correct answer is B (And variable cost are constant). The formula for total contribution is given as:

Total Contribution =

This formula is valid only if the contribution per unit remains constant, which means that both the selling price and the variable cost per unit must remain unchanged. If either the selling price or the variable cost varies, the contribution per unit would change, making the formula invalid.

  • 5 Marks

MA – May 2019 – L2 – Q2a – Cost-volume-profit (CVP) analysis

Determine the total variable cost per unit, total fixed overhead, and express the cost function based on given data.

Komosa Ltd is reviewing the selling price of its product for the coming year. A forecast of the annual costs that would be incurred by Komosa Ltd in respect of this product at differing activity levels is as follows:

Annual production (unit) 100,000 160,000 200,000
Direct materials (GH¢000) 200 320 400
Direct labour (GH¢000) 600 960 1,200
Overhead (GH¢000) 880 1,228 1,460

The cost behavior represented in the above forecast will apply for the whole range of output up to 300,000 units per annum of this product.

Required:
i) Calculate the total variable cost per unit and total fixed overhead. (4 marks)
ii) State the total cost function. (1 mark)

i) Total Variable Cost per Unit and Total Fixed Overhead:

  • Material Cost:
    GH¢ 200,000 / 100,000 units = GH¢ 2 per unit
  • Labour Cost:
    GH¢ 600,000 / 100,000 units = GH¢ 6 per unit
  • Variable overhead cost:
    Using high-low method:
    (GH¢ 1,460,000 – GH¢ 880,000) / (200,000 units – 100,000 units) = GH¢ 5.8 per unit
  • Total variable cost per unit:
    GH¢ 2 (materials) + GH¢ 6 (labour) + GH¢ 5.8 (overhead) = GH¢ 13.8 per unit
  • Fixed cost:
    Using the cost at 200,000 units:
    Total cost = GH¢ 1,460,000
    Variable cost = 200,000 units * GH¢ 13.8 = GH¢ 1,380,000
    Fixed cost = Total cost – Variable cost = GH¢ 1,460,000 – GH¢ 1,380,000 = GH¢ 300,000

(4 marks)

ii) Total Cost Function:

Total cost function: Y = GH¢ 300,000 + GH¢ 13.8x

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