L4M2 Exam Dumps : Defining Business Needs

Comprehensive and Detailed Explanation (paraphrased from CIPS L4M2 content)

CIPS L4M2 defines fixed costs as those that do not change in total with small changes in the level of activity within a relevant range (for example, rent, insurance, basic utilities standing charges).

Premises costs (C) – such as rent and building insurance, are typically fixed: they are paid regardless of production volume (within normal operating levels).

Utilities costs (D) – often treated as fixed or semi-fixed in exam-style questions: the organisation pays standing charges and must maintain services regardless of output.

In contrast:

Staff overtime (A) – varies with workload; this is a variable cost.

Sales commission (B) – depends on sales volume, so it is variable.

Materials costs (E) – directly linked to output (more units = more materials), so variable.

Understanding fixed versus variable costs is vital when preparing a business case (e.g. break-even, sensitivity analysis, and assessing the impact of demand changes).

Relevant CIPS L4M2 areas:

Cost behaviour: fixed, variable, semi-variable

The role of cost analysis in business cases and sourcing decisions

Overhead allocation and cost structures

Explanation

Labour variance refers to a situation in which actual costs of labor differ from projected or budgeted labor costs. This concept is most commonly applied in manufacturing environments.

Labour variance either results from efficiency or rate discrepancies. Efficiency variance results when actual time worked is more or less than budgeted time for a project. Rate variance means you paid more per hour worked than expected. This may occur with overtime pay or when you have higher paid employees on a project than projected. Labour variance is fairly typical, but modest variance is usually not a big factor in manufacturing, because materials and other production costs are often much higher.

LO 1, AC 1.4