ACCT 002 Lecture Notes - Lecture 5: The Intercept, Variable Cost, Fixed Cost

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blackpig616

15 Aug 2020

School

College of The Sequoias

Department

Accounting (ACCT)

Course

ACCT 002

Professor

cooper

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Document Summary

Use caution when applying cost behaviour assumptions to output levels that fall outside of the company"s relevant range of operations. Straight-line cost relationships that are assumed within the relevant range may actually be semi-variable costs. Example: at extremely low levels of output, workers often use more materials per unit or require more time per unit than they do at higher levels of output. As the level of output increases, workers learn how to use materials and time more efficiently so that the variable cost per unit decreases as more and more output is produced. Accounting records typically show only total cost and the associated amount of activity of a mixed cost item. Therefore, it is necessary to separate the total cost into its fixed and variable components. Only through a formal effort to separate costs can all costs be classified into the appropriate cost behaviour categories.

Related Questions

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

18. To calculate budgeted direct labor costs, multiply thenumber of units to be produced by the number of projected directlabor hours. Next, multiply that total by the average direct costper hour.

True

False

22. A flexible budget summarizes revenues and costs for variouslevels of sales volume within a relevant range.

True

False

29. A cost variance measures the difference in quantities ofactual inputs used and the standard quantity of inputs allowed forthe actual number of units produced.

True

False

32. Unfavorable variances are subtracted from each other toarrive at a favorable variance.

True

False

34. A direct labor cost variance is unfavorable if the employerpays workers more per hour than budgeted.

True

False

36. In a standard cost system, the manufacturing overheadallocated to production equals the standard overhead allocationrate multiplied by the standard quantity of the allocation baseallowed for expected output.

True

False

37. The direct materials cost and efficiency variances make upthe total direct materials variance.

True

False

41. Which of the following statements is true of absorptioncosting?

A) It considers variable selling and administrative costs asproduct costs.

B) It considers fixed selling and administrative costs asproduct costs.

C) It considers fixed manufacturing overhead cost as productcosts.

D) It considers variable manufacturing overhead cost as periodcosts.

42) Which of the following is true of the traditional format ofthe income statement?

A) It is prepared under the variable costing method.

B) It shows contribution margin as a line item.

C) It is not allowed under GAAP.

D) It is prepared under the absorption method.

43) Unit product cost calculations using absorption costing donot include ________.

A) fixed manufacturing overhead

B) variable manufacturing overhead

C) variable selling and administrative costs

D) direct materials

85. Provide responses to the following questions regarding thediscount rate.

Question? Your response

What does the discount rate represent?

What are other names for the discount rate?

Is the following statement true? Discuss the reason for yourresponse. "The higher the risk, the lower the discount rate."

orchidduck907

Need help with my case study for my managerial accouting class,any help will be greatly appreciated.

Part 1 15 points

Cingle Company LLC produces gadgets at one manufacturingfactory. Corporate headquarters are located at the same site.Historical cost information shows the average costs at thefollowing production levels .

Production in units	3,000	3,750	4,500
Cost of goods manufactured
Direct Materials	$ 198,000	$ 247,500	$297,000
Direct Labor	126,000	157,500	189,000
Overhead
Building depreciation-factory	5,000	5,000	5,000
Equipmentlease	4,500	4,500	4,500
Factorysupplies	1,600	1,930	2,260
Indirect Labor	5,500	5,500	5,500
Quality InspectionCosts	13,360	14,200	15,040
Selling and Administrative Expenses
Shipping	45,500	51,875	58,250
Advertisingexpense	50,000	50,000	50,000
Salaries andcommissions	137,000	155,000	173,000
Insuranceexpense	10,000	10,000	10,000
Total	$ 596,460	$ 703,005	$ 809,550

A. Identify each ofthe companyâs costs as being variable, fixed or mixed with respectto the number of units produced. Explain why you chose that costbehavior. [Hint: What happens to total cost if the cost behavior isfixed, is variable, is mixed? What happens to cost / unit if costbehavior is fixed, is variable, is mixed?] Show all computationsneeded to determine cost behavior.

NOTE: If the cost is mixed, please use thechart in part B to detail your explanation.

Use the chart below:

Cost	Fixed	Variable	Mixed	Explanation
Direct Materials		X		The total cost increases but cost/unit ($66) remainsconstant.
Direct Labor
Building depreciation-factory
Equipment lease
Factory supplies
Indirect Labor
Quality Inspection Costs
Shipping
Advertising expense
Salaries and commissions
Insurance expense

B. Using the high-lowmethod, separate each mixed cost into variable and fixed elements.State the cost formula for each mixed cost. Show all your work andcomputations.

Use the chart below:

Mixed Cost (Name)	Cost Formula (Y = a + bx form)	Supporting Computations

C. Determine the expectedtotal costs (identify each cost separately) at a production levelof 5,000 widgets. Show computations. You should arrive at a totalcost figure.

Use the chart below:

	Cost	Supporting Computations
Direct Materials
Direct Labor
Building dep-factory portion
Equipment lease
Factory supplies
Indirect Labor
Quality Inspection Costs
Shipping
Advertising expense
Salaries and commissions
Insurance expense
TOTAL COST

D. State the costequation for the total costs of the entire company in the form Y =a + bx. Using alternative one or alternative two below, show howyou determined the cost equation. (Note: you should have oneequation such that someone could determine expected total cost forany activity level within the relevant range.)

Company â Wide Cost equation:

Use the chart below (Alternative one) which shows the fixed costportion and the variable rate for each cost itemor use the high- low method (Alternative two) fordetermining the cost equation. You need to choose only onealternative.

Alternative one: (use the information and chartfrom part A and the information from part B. Input the $ amounts inappropriate columns and total the columns of the chart. Using thechart information, state the cost equation in the Y = a + bxform.)

	Fixed Cost	Variable Rate ($/unit)
Direct Materials
Direct Labor
Building dep-factory portion
Equipment lease
Factory supplies
Indirect Labor
Quality Inspection Costs
Shipping
Advertising expense
Salaries and commissions
Insurance expense
TOTAL COST

Alternativetwo: High-low method and supporting, labeledcomputations.

Part Two 20 points

Goggle Company manufactures a special virtual reality gogglethat can be used underwater. The companyâs contribution formatincome statement for last year is below:

	Total	Per Unit	% of Sales
Sales (10,000 units)	$750,000	$75	100%
Variable Expenses	450,000	45	?
Contribution Margin	300,000	$30	?
Fixed Expenses	170,000
Net Operating Income	$130,000

Goggle Company is ready to take off and expand its market share.Management has asked for several items to be analyzed in order tomake good decisions.

Calculate the companyâs contribution margin ratio and thevariable expense ratio.

Compute the companyâs break-even point in both units and insales dollars. You may use either the equation method or theformula method.

Management is predicting a 20% increase in sales next year,staying within the relevant range for the company. How much willthe companyâs net operating income increase?

Refer to the original data. Assume that management would like toearn a profit of at least $55,000. How many units will have to besold to meet this target profit?

Refer to the original data. Compute the company's margin ofsafety in both dollar and percentage form.

Compute the company's degree of operating leverage at thepresent level of sales.

Assume that through a more intense effort by the sales staff,the company's sales increase by 8% next year. By what percentagewould you expect net operating income to increase? Use the degreeof operating leverage to obtain your answer.

Verify your answer to (b) by preparing a new contribution formatincome statement showing an 8% increase in sales.

In an effort to increase sales and profits, management isconsidering the use of a higher quality virtual reality system thanthe current system. The new system would increase variable costs by$15 per unit, but management could eliminate one quality inspectorwho is paid a salary of $30,000 per year. Management believes theycan increase the selling price by $30 per unit.

Assuming that changes are made as described above, prepare aprojected contribution format income statement for next year. Showdata on a total, per unit, and percentage basis.

Compute the company's new break-even point in both units anddollars of sales. Use the formula method.

Would you recommend that the changes be made? Why or whynot?

graybear312

ACCT 002 Lecture Notes - Lecture 5: The Intercept, Variable Cost, Fixed Cost

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