Cost behavior

This topic has 7 replies, 2 voices, and was last updated 8 years ago by John Moffat.

Viewing 8 posts - 1 through 8 (of 8 total)

Author

Posts
September 7, 2014 at 9:25 am #194157
Paige
- Topics: 9
- Replies: 15
A company has the below info available regarding costs at some levels of monthly production:

A. Classify each cost as fixed, variable, mixed costs. I have done this part with the following answer:

Direct materials – VC
Direct labor – MC
Indirect materials – MC
Supervisors’ salaries – FC
Depreciation on plant – FC
Maintenance – MC
Utilities – MC
Insurance on plant and equipment – FC
Property taxes on plant – FC

Please correct me if I am wrong.

B. Find an equation for total production costs -> I have no idea how to find a variable rate for this question.
September 7, 2014 at 9:36 am #194161
John Moffat
Keymaster
- Topics: 57
- Replies: 50561
A. You are correct except: Direct labour is a variable cost. Otherwise fine 🙂

B. The equation you after is:

Total cost = fixed cost + (quantity x variable cost per unit)

The ones listed as FC are obviously all fixed costs.
The ones labelled VC are variable costs, and to get cost per unit you divide the total in the list by the number of units.
For those labelled MC, since they are part fixed and part variable, you need to use the high/low method (which is covered in my free lecture on cost classification and behaviour).
September 7, 2014 at 11:50 am #194168
Paige
- Topics: 9
- Replies: 15
I watched your lecture in terms of cost classification and behavior. And it really helps a lot. It’s easy to understand and by following it, I am able to finish the rest of the question by myself 🙂

Thanks for correcting me about the ‘direct labor’, I just find out ‘Indirect materials’ is also variable cost.
September 7, 2014 at 3:36 pm #194185
John Moffat
Keymaster
- Topics: 57
- Replies: 50561
You are right – I missed that one. Sorry 🙂
September 17, 2014 at 9:43 am #195227
Paige
- Topics: 9
- Replies: 15
I also have this question but can’t get it correct completely. It’s a computer based question but anytime I submit, I only get 50% of correctness.
September 17, 2014 at 6:19 pm #195277
John Moffat
Keymaster
- Topics: 57
- Replies: 50561
For part A, you are only being asked about electricity cost.
How can the fixed cost possibly be $35000 when the cost each month is always a lot less than that!!! 🙂

Using high/low on electricity, the variable cost is (20,000 – 15,000) / (1200 – 700) = $10 per hour. (And you should now be able to calculate the fixed cost per month)

Your answer to part B is correct.

Your answer to part C is correct also 🙂
September 18, 2014 at 1:10 am #195330
Paige
- Topics: 9
- Replies: 15
I should have read the question carefully !! In the mean time while waiting for your help, I figured it out myself haha. Anyway, still appreciate your help a lot.
September 18, 2014 at 5:08 pm #195404
John Moffat
Keymaster
- Topics: 57
- Replies: 50561
Sorry I did not reply sooner, but I was teaching all day!

I am glad you sorted it out OK anyway 🙂
Author

Posts

Viewing 8 posts - 1 through 8 (of 8 total)

You must be logged in to reply to this topic.