How to segregate semi-variable cost.

Semi-variable costs:- Semi-variable costs are mixed costs, a portion is fixed and another portion is variable. For example Telephone Expenses, Electricity bill, Service department wages e.t.c

We can segregate semi-variable costs in the following way.

Per unit variable cost = Difference in total costs / Difference in total units

Amount of variable costs = Per unit variable cost * No.of units

Amount of Fixed Costs = Total Costs - Amount of variable costs

Let us consider the following example, it costs tk.84,000 to produce 14,000 units of product X and tk.96,000 to produce 20,000 units. Now we can segregate the cost by applying the above formulas.

Per unit variable cost = (96,000 - 84,000) / (20,000 - 14,000)
                               = 12,000 / 6,000
                               = 2

Amount of variable costs = 2 * 14,000
                                      = 28,000

Amount of Fixed Costs = Total Costs - Amount of variable costs
                                    = 84,000 - 28,000
                                    = 56,000

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What is relevant cost

Relevant cost: Relevant costs are the costs that differ between alternatives. Sunk costs and future costs that will not differ between alternatives are irrelevant costs.

Relevant costs are used to make the following decisions

1. Make or Buy Decisions: - Decisions about producing a product in-house or purchase it from outside suppliers.  Fixed costs of production are irrelevant here, only variable costs of manufacturing should be considered for making such decisions.

2. Accepting or Rejecting Special Orders: - Decisions about whether receiving a special order from customers or not. For making such decisions only the costs associated with carrying the special order should be considered and if it is considered that current sales will not be affected by choosing the special order then the company may accept that order.

3. Adding or Dropping a Product Line: - Decisions about adding a new product line or dropping a losing unit. If a unit is making loss then it does not mean that the unit should be dropped. If the contributions from the loosing unit can contribute to the allocated fixed costs then the unit should not be dropped.

4. Utilization of constraint resources: - Resources are always limited so we need to use resources in a way that will generate optimum gain. For example ABC Company produces two products, Product X and Y. Product X require 1 machine hour per unit and product Y requires 1.5 machine hours per unit. Per machine hour product X contributes tk.2, Product Y contributes tk.3. ABC Company has limited machine hours so it will pay first preference for utilization of machine hours to product Y because it contributes more than Product X per machine hour.

5. Decisions about selling or further processing: - In some industries, a number of end products are produced from a single raw material input. Two or more products produced from a common input are called joint products. The point where each joint product is recognized as separate product is called the split off point. Some products need further processing after the split off point. If incremental revenue is greater than the incremental costs of further processing then we will do further processing.

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What is accrued interest

Accrued interest: - Accrued interest is the unpaid interest which is accumulated on a loan or security. For example XYZ company has a loan of BDT 1,00,000 @ 10% payable in monthly equal installment. The interest of January month will be the accrued interest for February if it is not paid in January.

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What is Appreciation

Appreciation: Appreciation means an increase in value of an asset. It is just like opposite of depreciation.

For example, If a machine purchased at BDT100 before 2 years ago and now it has a market price of BDT300 then there is an appreciation in value of that machine. The machine is appreciated by BDT100.

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What is margin of safety.

Margin of Safety:- Margin of safety is the excess amount of sale over the Break Even Sales. it is simply the difference between Actual sales and Break Even Sales.

Margin of Safety = Actual Sales - Break Even Sales

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