Question

Explain how costs change as volume changes.

Please no hand-written answers.

Answer 1

For a manufacturing unit, cost depends on the activities in production of the good and making it available for sale. It includes purchase of materials, labour charges and other overhead expenses. Cost is divided in to two based on the nature, such as Fixed Overheads and Variable Overheads.

Fixed Costs are fixed in nature, which means even if the volume of production changes this cost remain constant. For example, Electricity charges, Building Rent, Salary to Staffs etc.. these expenses do not change based on the volume of goods produced.

Variable Costs are those which are variable in nature, these expenses changes based on the volume of goods produced. For example, material costs, wages to workers based on piece rate, commission, freight output etc...

Example:

ABC Ltd produces 1000/500/1500( case I/II/III) units in the year 2019, the costs incurred by ABC Ltd is given below;

Electricity charges - 100000 per year

salary to staffs - 500000 per year

Rent - 50000 per year

Direct Materials - 1000 per unit

Wages - 250 per unit

The total cost incurred by ABC Ltd in each case are as follows:

Cases		I	II	III
Volume of Production		1000	500	1500
Variable Cost :
Direct Material	1000	1000000	500000	1500000
Wages	250	250000	125000	375000
Fixed Cost    :
Electricity charges	100000
Salary to staffs	500000
Rent	50000	650000	650000	650000
Total Cost		1900000	1275000	2525000

In each case cost changes when volume changes.