When analysing costs, you need to know how those costs behave. You can separate costs into fixed, variable and semi variable costs. Total fixed costs remain the same, regardless of the level of output, while variable costs increase with the level of output.
Semi variable costs
Semi variable costs have an element of both fixed and variable costs.
To calculate the fixed and variable split of semi variable costs you can use the high low method. To use this technique, you need to know the semi variable costs for at least two different activity levels.
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Let’s work through an example.
We produce a particular product and we have semi variable costs of £4000 at 100 units of output and £13000 at 400 units of output.
To work out the variable element we need to first work out the difference between the costs.
In our example we subtract £4000 from £13000 to leave £9000.
We then work out the difference between the units of output.
In our example we subtract 100 from 400. This gives 300.
The next step is to divide the difference in cost, £9000, by the difference in units, 300 units. This gives the variable element of £30 per unit.
To work out the fixed costs we then multiply the cost per unit of £30 by one of the levels of output. £30 multiplied by 100 is £3000. The actual total cost at 100 units is £4000; therefore, if we subtract £3000 from £4000 this gives the fixed cost of £1000.
We can then check the figures by multiplying £30 (cost per unit) by 400 units. This gives £12000. If we add £1000 fixed costs this gives the total costs of £13000.
This can then be applied to any different levels of output.
The high low methods for semi variable costs is covered in more depth at AAT level 4 Professional Diploma, in the Budgeting and Financial Performance units. To find out more about developing your knowledge of accounting, get in touch below.