ADM 2341 Chapter Notes - Chapter 6: Fixed Cost, Variable Cost, Mortise And Tenon

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periwinklebeetle432

27 Jan 2016

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Chapter 6 cost behaviour: how firms react to changes in activity cost structure: proportion of fixed, variable, and mixed cost found in an organization. Variable costs: total dollar varies in direct proportion to change in level of activity. The activity base: measure of what causes incurrence of a variable cost. True variable costs: vary with direct proportion as level of activity. Inventory can be carried out into the next period. Step variable costs: cost that is obtained in large chunks and increases/decreases only in response to large changes in activity. Linearity assumption and relevance range: people assume that variable costs are linear, but they can also be curvilinear (relationship that curves) Fixed cost: per unit becomes smaller as it increases but amount is constant. Committed fixed cost: difficult to adjust and that relate to investment in facilities, equipment, and basic organizational structure of firm, long term. Discretional fixed costs: arise from annual decisions by management ex advertisement.

Related Questions

Question : Cost behaviour; committed and discretionary costs; highâlow method: mining company

Outback Mining Ltd (OML), which mines ore in Australia's north-west, uses a calendar year for financial reporting purposes. The following selected costs were incurred in December, the low point of activity, when 1400 tonnes of ore were extracted.

Straight-line depreciation $30 000

Charitable contributions* 12 000

Mining labour (including oncosts) 315 000

Royalties 140 000

Trucking and hauling 280 000

Peak activity of 2700 tonnes occurred in June, resulting in mining labour costs (including oncosts) of $607 500, royalties of $224 500, and trucking and haulage costs of $360 000. The trucking and hauling costs exhibit the following behaviour:

Less than 1 500 tonnes $240 000

From 1 500â1 899 tonnes 280 000

From 1 900â2 299 tonnes 320 000

From 2 300â2 699 tonnes 360 000

OML uses the highâlow method for analysing cost behaviour.

Required:

1 Assuming that royalties are a semi variable cost, classify each of the other four costs listed above in terms of their behavior as variable, step-variable, committed fixed, discretionary fixed, step-fixed, or semi-variable. Show calculations to support your answers for mining labour costs.

2 Calculate the total cost for next February when 1650 tonnes of ore are expected to be extracted.

3 Comment on the cost effectiveness of hauling 1500 tonnes with respect to OML's trucking/hauling cost. Can the company's cost effectiveness be improved? How?

4 Distinguish between committed and discretionary fixed costs. If OML were to experience severe

limeskunk177

Cost Behavior and Operating Income

posted Nov 28, 2016, 4:07 AM

Variable costs are directly proportionate to the level ofproduction activity for the period. So if your units produceincrease, then your variable costs will increase. Fixed costsremain constant over a wide range of production activity so nomatter what your amount of production, your fixed cost remains thesame. Semi-variable costs have a fixed element and a variableelement. Your utility bill would be a good example of that cost.How do you first, figure out how to separate fixed vs variablecosts in semi-variable costs to allocate to jobs? AND I'm going tostretch you...what are stepped fixed costs?

emeraldeel675

1. Which one of the following refers to a cost that remains the same as the volume of activity decreases within the relevant range?

A. Average cost per unit.

B. Variable cost per unit.

C. Unit fixed cost.

D. Total variable cost.

2. The relevant range refers to the activity levels over which

A. Cost relationships hold constant.

B. Costs fluctuate.

C. Production varies.

D. Relevant costs are incurred.

3. When identifying fixed and variable costs, which one of the following is a typical assumption concerning cost behavior?

A. General and administrative costs are assumed to be variable costs.

B. Cost behavior is assumed to be realistic for all levels of activity from zero to maximum capacity.

C. Total costs are assumed to be linear when plotted on a graph.

D. The relevant time period is assumed to be 5 years.

4. A management accountant is about to prepare graphs of total variable cost and per-unit variable cost for use in a short-term planning model. Dollars will be depicted on the vertical axis; activity will be shown on the horizontal axis. How will these graphs appear under completion?

Total Variable Cost; Per-Unit Variable Cost

A. Straight line, sloping upward to the right; Straight line, parallel to the horizontal axis

B. Curvilinear, sloping upward to the right; A line that basically parallels the horizontal axis, first decreasing and then increasing

C. Straight line, sloping upward to the right; Straight line, sloping upward to the right

D. Straight line, parallel to the horizontal axis; Straight line, sloping upward to the right

5. A company has found that its total electricity cost has both a fixed component and a variable component within the relevant range. The variable component seems to vary directly with the number of units produced. Which one of the following statements concerning electricity cost is incorrect?

A. The total electricity cost will increase as production volume increases.

B. The total electricity cost per unit of production will increase as production volume increases.

C. The variable electricity cost per unit of production will remain constant as production volume increases.

D. The fixed electricity cost per unit of production will decline as production volume increases.

silversnake284

ADM 2341 Chapter Notes - Chapter 6: Fixed Cost, Variable Cost, Mortise And Tenon

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