The Excel Project: Excel for Accountants, Business People ... from the Beginning by Duncan Williamson

Author:Duncan Williamson [Williamson, Duncan]
Language: eng
Format: azw3
Published: 2012-08-09T00:00:00+00:00

The Excel Project: Excel for Accountants, Business People … from the Beginning © Duncan Williamson ExcelMaster August 2012

Chapter 8: Behaviour of Costs  Splitting costs into their fixed and variable elements  Non linear costs

 The linear treatment of costs: true and fair?

Introduction

Accountants generally talk in terms of their being three basic behaviours of cost:  Variable cost

 Fixed cost

 Semi Variable cost

The following three graphs show how these costs are generally represented, again by accountants:

We stress the accountant aspect of this because much of the basic work of all accountants in the area of the behaviour of costs is done in terms of straight lines. Moreover, the final part of this chapter is concerned with the question of whether dealing with costs in a linear way gives us a true and fair view of a business or situation.

We begin this chapter with a review and analysis of linear cost behaviour and then move onto the non linear behaviour of cost. Finally we will answer the question of whether we ought to work with appropriate cost behaviours whether that is linear or non linear.

Definitions

We can define the three basic cost behaviours we have been discussing in the following way:  Fixed cost: a cost that stays fixed even when the number of units produced or provided changes

 Variable cost: a cost that varies in direct proportion to output: the more we make or provide, the bigger the total variable cost

 Semi variable cost: a cost that is a mixture of fixed and variable elements. Total organisation wide costs are usually semi variable costs

© Duncan Williamson ExcelMaster August 2012 Page 324 of 579

Linear Cost Functions

If we are dealing with linear costs, that is, costs that lie on perfectly straight lines, then we need to appreciate that we can represent those costs algebraically in the following ways:  Total fixed cost: y = a  Total variable cost: y = bx  Total semi variable cost y = a + bx

We can apply these functions to the charts we have just seen:

Let’s put these functions together now with some basic data to see what they mean in practical terms:

Consider the data for the three costs shown in the table below the total fixed costs for a year are £50,000

variable costs per unit of production £2.25

total output for the year 10,000

Express each of the costs algebraically

Complete the cost schedule (table) below for each cost in total: Cost Schedules

Output Total Total Total

Fixed Variable Costs

Costs Costs

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

The Excel Project: Excel for Accountants, Business People … from the Beginning © Duncan Williamson ExcelMaster August 2012 From the table above, prepare a chart in Excel for each of the cost behaviour types; and for every chart set the horizontal scale to a maximum of 10,000 units and the vertical scale to the maximum value for the Total Cost.

Make sure you try to answer these questions yourself.

All examples in this chapter are to be found in one file: chapter_eight.xlsx.

Solutions The most efficient way of preparing the cost schedules is as you can see in the following screenshot.

Download

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