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A particular cost has been classified as ‘semi-variable’.
How will the average cost per unit of activity be affected by a 20% reduction in the level of activity?A Decrease by less than 20%
B Decrease by more than 20%
C Increase by less than 25%
D Increase by more than 25%Book answer is D.
My answer is A.
Can you please tell sir how?Question 2:
Which TWO of the following costs would NOT be considered to be sound procedures implemented in order to reduce materials wastage and discrepancies.1. Ordering in bulk in order to reduce order costs
2. Having one staff member responsible for ordering and checking deliveries
3. Demanding material requisition notes from production departments
4. Performing regular inventory volume checks
5. Using goods received notes to update inventory recordsAnswer is 1 and 2 … How is 2 poorer procedure than 5? In 2 we at least can have good material check which can decrease wastage.
In 5, we are having record of good received note which is document of goods received from supplier.Please explain Professor.
Question 3:
A question in the kit said that
The cost od interest incurred in financing materials is need to find EOQ.
Can you explain is how it is part of it?
EOQ depends on 3 things which is order cost, annual demand and holding cost.The variable element will decrease in proportion to output. The fixed element will have to be spread over fewer items if output decreases. Therefore, total cost per unit will increase, but only because of the fixed element of the cost.
So let’s say variable per unit is 5. Total fixed costs 1000 elememt is and original output 100 units.
Original cost per unit is 5 + 1000/100 = 15
If output falls 20% to 80, new cost per unit is 5 + 1000/80 = 17.5.
% increase = is (17.5 – 15)/15 = 16.6%
I think answer is C
Yes sir. You are right answer is C not D in the book.
I did question in same manner now but I put variable cost as 2 and fixed cost as 10. My units were 10 at start and after reduction were 8.
10 unit so 2+1= 3
8 units so 2+(10/8)= 3.25
Increase = (0.25/3) x100= 8.33%
It is showing 8.33 increase.
So the increase will vary. That is why it has given range till 25%.Sir please help with other 2 question also. Thank you.
Q2. The point is that if only one person is involved in checking, they might get it wrong or might commit a fraud as no-one else is checking. Fraud will cause discrepancies. 5 is the normal way to update inventory for receipts.
Q3. The holding cost in the EOQ formula is the cost of holding one unit for one year. If interest rates rise then the cost of financing a unit for a year also rises.
Thank you sir.
Just a last query. Cost of interest incurred in financing material means that the interest on amount which was used to buy inventory or does it means that the interest on amount used in holding inventory?It is a holding cost per year for a unit, but that relates to the purchase of the item. If the item costs 80 and interest rates are 4%, to hold that item for a year ties up 80@4% = 3.2.
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