ACG 2071 Lecture Notes - Lecture 9: Professional Liability Insurance, Fast Food Restaurant, Variable Cost

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chocolateleopard236

5 Oct 2018

School

University of Florida

Department

Accounting

Course

ACG 2071

Professor

Schadewald

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Document Summary

What is cost behavior: how a cost reacts to changes in level of activity. Important when predicting costs at a different activity levels: per-unit cost at projected level of production, total costs at projected level of sales. Fixed total cost stays same as activity increases. Variable total cost increases as activity increases. Mixed elements of both fixed and variable costs. *need to understand impact of change in activity level on both total costs and per-unit costs. Variable cost: key characteristics: cost is incurred for every unit of activity, total cost, changes in direct proportion to changes in activity, per-unit cost. If activity increases 50% total costs increase 50: remains constant at every level of activity, example: component parts, shipping costs. Fixed cost: key characteristics: total cost, does not change in response to changes in activity, remains constant at every level of activity (within relevant range, per-unit cost, varies inversely with changes in activity, decreases as activity level increases.

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

Mansah Co., Ltd., of Ghana is a manufacturing company whose total factory overhead costs fluctuate considerably from year to year according to increases and decreases in the number of direct labor-hours worked in the factory. Total factory overhead costs at high and low levels of activity for recent years are given below: Level of Activity Low High Direct labor-hours 56,100 74,800 Total factory overhead costs $ 276,310 $ 315,580 The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 56,100-hour level of activity as follows: Indirect materials (variable) $ 95,370 Rent (fixed) 130,000 Maintenance (mixed) 50,940 Total factory overhead costs $ 276,310 To have data available for planning, the company wants to break down the maintenance cost into its variable and fixed cost elements. Required: 1. Estimate how much of the $315,580 factory overhead cost at the high level of activity consists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $315,580 consists of indirect materials and rent. Think about the behavior of variable and fixed costs

viridianantelope156

PROBLEM 2-17 High-Low Method; Predicting Cost [LO2-4, LO2-5] Sawaya Co., Ltd., of Japan is a manufacturing company whose total factory overhead costs fluctu- ate considerably from year to year according to increases and decreases in the number of direct labor-hours worked in the factory. Total factory overhead costs at high and low levels of activity for recent years are given below: Level of Activity High Direct labor-hours ................. Total factory overhead costs ........ Low 50,000 $14,250,000 75,000 $17,625,000 The factory overhead costs above consist of indirect materials, rent, and maintenance. The com- pany has analyzed these costs at the 50,000-hour level of activity as follows: Indirect materials (variable) ...... Rent (fixed) .... Maintenance (mixed) ...... Total factory overhead costs ..... $ 5,000,000 6,000,000 3,250,000 $14,250,000 To have data available for planning, the company wants to break down the maintenance cost into its variable and fixed cost elements. Required: 1. Estimate how much of the $17,625,000 factory overhead cost at the high level of activity con- sists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $17,625,000 consists of indirect materials and rent. Think about the behavior of variable and fixed costs!) 2. Using the high-low method, estimate a cost formula for maintenance. 3. What total factory overhead costs would you expect the company to incur at an operating level of 70,000 direct labor-hours?

ACG 2071 Lecture Notes - Lecture 9: Professional Liability Insurance, Fast Food Restaurant, Variable Cost

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