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QT Co manufactures a single product & an extract from their flexed budget for production costs is as follows.
Activity Level 80%:
DM = 2,400
Labour = 2,120
POH = 4,060Activity Level 90%:
DM = 2,700
Labour = 2,160
POH = 4,080What would the total production cost be in a budget flexed at the 83% level of activity: (to the nearest $)
A 6,266
B 6,888
C 8,586
D 8,688D is the answer. I’ve understood the answer completely. They’ve used those activity percentages as whole numbers and then based their calculations.
Direct Material is considered wholly Variable.
DM per % of activity = 2,400/80 = 30Labour & POH is considered semi-variable, therefore using High Low method for combined costs of Labour & POH.
Labour & POH per % of activity = (6240-6180)/(90-80) = 6
Fixed Element = 6180-(6*80) = 5,700I’m confused with some points:
1) They’ve not mentioned in any way the nature of costs i.e variable, fixed or semi variable. How are we supposed to approach this question? Should we check the behavior by simply checking variations in per unit cost? I supposed Labour Cost Variable and POH fixed at first.
2) They’ve supposed % as whole numbers. This can be a big confusion. Most of the students will simply divide 2,400 by 80% (not 80), getting 3,000 and keep guessing how they’ve calculated 30.
3) Last, if it is the way it is here, then is it worth 2 marks? I’m just curious about this one, nothing else..1. It is easy to check quickly the nature of the costs. They are obviously not fixed because the total changes. The materials are variable because dividing by 80% and by 90% gives the same result. The other two are obviously not variable (and are therefore semi-variable) because dividing by 80% and by 90% does not give the same result.
2. I don’t think that most students will have that problem 🙂
3. Yes – 2 marks. The MCQ’s in the exam are all 2 marks – some are much easier and some are much harder but all are 2 marks. That is why I say in my lecture how important it is in the exam to get the quick ones out of the way before you spend time on the longer or harder questions.
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