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Direct costs are costs which can be identified with a single cost unit, or cost centre. KAPLAN PUBLISHING 37 Types of cost and cost behaviour Test your understanding 4 The items of expenditure would be analysed as follows. (1) Fixed (2) Fixed (3) Fixed (4) Variable (5) Semi­variable (6) Semi­variable (7) Fixed (8) Stepped fixed (9) Variable Note that the depreciation charge for the factory machines (8) is a stepped fixed cost because as activity increases to such a level that a second and third machine are required, the fixed cost will double and then treble.

Expected values are not always suitable for making one­off decisions. This is because expected values are long­term averages and the conditions surrounding a one­off decision may be difficult to estimate.  EV calcuations are based on the value of money ‘today’ only.  For example, they do not look at the decision taker’s attitude to risk which will vary from person to person. 3 Linear regression analysis Line of best fit Consider the following data which relates to the total costs incurred at various output levels in a factory: Output Total cost (units) ($) 26 6,566 30 6,510 33 6,800 44 6,985 48 7,380 50 7,310 If the data shown above is plotted on a graph, it will look like this.

Illustration 2 ­ Analysis of costs into fixed and variable elements An organisation has the following total costs at three activity levels: Activity level (units) Total cost 4,000 6,000 7,500 $40,800 $50,000 $54,800 Variable cost per unit is constant within this activity range and there is a step up of 10% in the total fixed costs when the activity level exceeds 5,500 units. What is the total cost at an activity level of 5,000 units?  (Note: this fall applies to all units ­ not just the excess above 350).

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