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Dear John,
I am practicing and have some doubts concerinng the way we treat different types of costs. I aknowledge the fact we do flect only variable and semi variable costs. But i am not sure what to do in the case the text gives standard unit cost for fixed costs and not a total expenditure: shall I keep Stand unit cost per bdg unit?moreover I am confuse the way BPP classifies costs in this exercise and how
– variable: direct material + maintenance (why maintenance??)
– fixed cost: rent, rate depreciation (why?)
– basic wage are fixed cost, but treated as variables to calc efficiency and productivity ratios. (is it a rule for fixed wages, to be treated as variable costs when flexing??)
I don’t understand what brings the text to say they are fixed or variable. I have tried to divide 2 levels of production by singles voices of costs per diferent activity level and also variable cost per unit are not constant, so that I don’t understand if I have to choose the category by definition, without any calculation eg: material are always var, maintenace are always vari, prod overhead are always fixed etc..
thank you again for your time
EI do not have a BPP Study Text and without seeing the full exercise it is hard for me to explain.
Certainly maintenance is often likely to be variable (because the more you use a machine etc. the more you are likely to have to pay for repairs) although it is not always the case.
Depreciation is certainly a fixed cost, because all the standard ways of calculating depreciation are on a time basis – it is the same expense for the year however many units you produce.
Basic wages may be fixed or variable. Usually in questions they are variable (because they are paid per hour worked). However if they are paid a fixed wage regardless of how much (or little) work they are doing, then it is a fixed cost.
If you are given two levels of production and the costs for each level (which often happens in exam questions), then if the total of a cost is the same for both levels then it is a fixed cost.
If the total cost is different, but the cost per unit is the same, then it is simply a variable cost.
If it is neither of the above, then it is a semi-variable cost and you will be expected to use the high-low technique in order to calculate the variable cost per unit and the fixed cost.If you are watching all of our free lectures in chapter order, then you do not need a Study Text. Our lectures are a complete course for paper F2 and cover everything needed to be able to pass the exam well. The only book you do then need is a Revision Kit, because they contain lots of exam standard questions, and question practice is vital if you are to pass the exam.
thnak you very much John.
Unfortunately I cannot copy and paste form the ebook. I saw your lectures and it was clear, but bpp confused me. so I will decide following your method: if they are fixed if fixed bdg and act stay fixed, var if unit cost is constant and semifixed if the unit cost changes among different activity levels.Just to give you an example of BPP.
depreciation is said to be fixed, but it changes for two different levels of activities! so that it sounds absurd to me.
fixed bdg : $ 2000 on 2000 units produced
actual : $ 2200 on 3000 units!NB no inventory changes.
it seem to be not fixed either variable! i would say a sami variable. Confused about this way they classify!
regards
It is certainly not fixed from what you have written, and seems very odd of BPP.
Best is to follow the rule I gave you 🙂
Ops John I find the same in your exercise from the lecture. So that I probably am missing something.
Reviewing notes on exercise on flexed bdg, we had:
fixed oh:
10000$ for fixed bdg, with sales=produced units 10000 units
11000$ for actual figures, with sales (notes don’t say = production) = 12000 unitseither in this case it does not seem to be fixed 🙁
You are misunderstanding.
The purpose of flexing the budget is so that we can then compare what actually happened with what should have happened.
The original budget was for production of 10,000 units and the fixed overheads were budgeted to be $10,000.
The actual production was 12,000 units and so when we flex the budget we would still expect the fixed overheads to be $10,000 (all the variable costs we would expect to increase).Now we can compare what actually happened with what should have happened.
On fixed overheads we actually spent $12,000, but it should have been $10,000, so we would need an explanation from the manager responsible as to why we over-spent by $2,000 – something must have gone wrong and we need to know what.That is why we prepare flexed budgets – so that we can compare what actually happened with what should have happened for the same level of production.
Oh ok. Thus, if I understand well, i cannot compare figures from act and fixed bdg to figure out if their unit cost is constant (variable) or increasing (fixed cost).
copying bpp data. How could I know if this cost voices are fixed, variables, or sempi variables?
fixed bdg $ actual $
production (units) 2000 3000
revenue ($) 20000 30000
direct material 6000 8500
direct labour 4000 4500
maintenance 1000 1400
depreciation 2000 2200
rent and rates 1500 1600they say: – material and maintenance are variable
– wage are fixed but treated as variable for effic.-productiviti calculation
– rent and rates and depreciation are fixed.The point is: could I deduce from this info if costs are fixed or I should need they say it to me? do I need same voices for different levels of activity (flexed vs flexed, bdg vs bdg, act vs act) to base my evaluation on unit cost movement?
thank you again very much
ESubject to whether other information is given (and in the real exam it would be made clear), direct materials and direct labour are always variable.
Depreciation is always fixed.
Rent and rates you would always assume were fixed (unless the question said differently).
Maintenance could really be either, but unless more information were given in the question they you would assume it to be variable.
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