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ACC 406 Lecture 3: Week 3 - Ch. 3

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School
Ryerson University
Department
Accounting
Course
ACC 406
Professor
Alison Beavis

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Document Summary

Cost behaviour: the ways costs change as the related activity changes. Fixed cost: does not change in total as the output changes. Variable cost: changes in total as output changes. Relevant range: the range of outputs over which the assumed cost relationship is valid for the normal operations of a firm; avoids extremely high/low levels of activity. Discretionary: can be changed with relative ease at the discretion of management. Committed: can not be changed with ease (i. e. a contract) Ex: v. c per computer @ 50,000 computers = 40 x 50,000. Mixed cost: cost that have both fixed and a variable component. Ex: 10 sales reps, each earns base salary of ,000 plus a commission of for each unit they sell. Tc = 30,000 + (25x # of units sold) Step costs: a constant cost for a range of output then jumps to a new cost level for a different range.

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Related Questions

Which of the following costs will not change as output changes?
 
(i) Marginal cost
(ii) Average fixed cost
(iii) Average variable cost
(iv) Total variable cost
(v) Total fixed cost

Question : Cost behaviour; committed and discretionary costs; high–low 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 1 500–1 899 tonnes 280 000

From 1 900–2 299 tonnes 320 000

From 2 300–2 699 tonnes 360 000

OML uses the high–low 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

What type of cost exhibits the behavior shown below? A. Variablecost. B. Fixed cost. C. Semivariable cost. D. Discretionary fixedcost. E. Step-fixed cost.