What is the difference between discretionary versus non-discretionary fixed costs, and can they be changed? Explain

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Nelly StrackeLv2

15 Jul 2018

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Related questions

A cost that can be identified by the equation Y = a +bX is known as a:

A. Variable/fixed cost

B. Mixed cost

C. Discretionary cost

D. Sunk cost

The question of the usefulness of cost allocations (discretionary accruals and management compensation plans) has been introduced in this and previous chapters. What, if anything, would you do about (fixed) cost allocations? Donât forget to consider political costs.

Question : Cost behaviour; committed and discretionary costs; highâlow method: mining company

Outback Mining Ltd (OML), which mines ore in Australia's north-west, uses a calendar year for financial reporting purposes. The following selected costs were incurred in December, the low point of activity, when 1400 tonnes of ore were extracted.

Straight-line depreciation $30 000

Charitable contributions* 12 000

Mining labour (including oncosts) 315 000

Royalties 140 000

Trucking and hauling 280 000

Peak activity of 2700 tonnes occurred in June, resulting in mining labour costs (including oncosts) of $607 500, royalties of $224 500, and trucking and haulage costs of $360 000. The trucking and hauling costs exhibit the following behaviour:

Less than 1 500 tonnes $240 000

From 1 500â1 899 tonnes 280 000

From 1 900â2 299 tonnes 320 000

From 2 300â2 699 tonnes 360 000

OML uses the highâlow method for analysing cost behaviour.

Required:

1 Assuming that royalties are a semi variable cost, classify each of the other four costs listed above in terms of their behavior as variable, step-variable, committed fixed, discretionary fixed, step-fixed, or semi-variable. Show calculations to support your answers for mining labour costs.

2 Calculate the total cost for next February when 1650 tonnes of ore are expected to be extracted.

3 Comment on the cost effectiveness of hauling 1500 tonnes with respect to OML's trucking/hauling cost. Can the company's cost effectiveness be improved? How?

4 Distinguish between committed and discretionary fixed costs. If OML were to experience severe