Stepped fixed costs practice question

SCloMar

Hi all

I have recently started studying Management Costing AAT Level 3. I was wondering if some generous person could help with a question I am trying to do about working out total stepped fixed costs. I have attached a pic - its from Osborne Tutor Zone Practice assessment 1 - task 8. The one I am struggling with is determining the Cost of 3000 units for Cost Classification 3



Using common sense I can guess the answer is £10 000 but I have no idea why? Is there a formula for working this out? I am assuming the high low method would not work here?

I used this forum a few times last year and found it so useful, so I am so hoping that a very kind and clever person can help explain this one to me. Thank you so much in advance.

Sarah

SCloMar

Any help is much appreciated. Even if I can just get pointed in the right direction on this one it would really help. Driving me nuts.... even showed my parents and my other half the question to have a go to see if I was missing something ? Xx

Pian32

Although not clear in the table I think it's meant to imply that the cost increases every 2000 units. Meaning 0-1999 = £5000, 2000-3999=£10000 etc
But i agree and remember this question confusing me as I didn't feel there was enough information.

SCloMar

Hi pian32. Thank you so much for getting back to me. I'm glad it's not just me who finds it confusing.... I just didn't know if I was missing something simple. Apparently the answer is 10 000! I had a look through the forums yesterday to see if anyone else had come up with this issue before and found this which sort of makes sense too?


Would be good to get your thoughts on it though? As I said any help is really appreciated! And Thank you for taking the time to reply xx

Pian32

The best way to think of stepped costs is a production line that requires a certain machine. That machine has a fixed cost to have but has a max production limit. Lets say 2000 units.

If you needed 2001 units you need a 2nd machine which again has the fixed cost value but you can now manage up to 4000 units total.

It means whenever you reach the limit you have to pay the cost up to the next full level and can't just have a partial payment.

SCloMar

Right I see what you mean now. Definately starting to make more sense thank you.

Last thing, do we always assume that the "step up" in costs is always the same value? So in my original question, the step is always by £5000 for every 2000 units? Sarah x