AFM102 Chapter Notes - Chapter 3: Fixed Cost, Variable Cost, Income Statement

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lemonbeetle804

16 Jun 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM102

Professor

Jie Joyce Tian

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Chapter 3

Cost Structure: The relative proportion of fixed, variable, and mixed costs found

in an organization.

Activity Base: A measure of whatever causes a variable cost to be incurred. For

example, the total cost of direct materials in a bicycle manufacturing company

will increase as the number of bicycles produced increases. Therefore, the

number of bicycles produced is an activity base for explaining the total cost of

direct materials.

Step-Variable Cost: A cost (such as the cost of a maintenance worker) that is

obtainable only in large amounts and that increases and decreases only in

response to fairly wide changes in the activity level.

Curvilinear Costs: Costs that show a curved relationship between cost and activity

rather than a straight-line relationship.

Committed Fixed Costs: Fixed costs that are difficult to adjust in the short term

and that relate to the investment in facilities, equipment, and the basic

organizational structure of a firm.

Discretionary Fixed Costs: Fixed costs arising from annual decisions by

management to spend in certain areas, such as advertising and research.

Account Analysis: A method for analyzing cost behaviour in which each account

under consideration is classified as either variable or fixed based on the analyst’s

prior knowledge of how the cost in the account behaves.

Engineering Approach: A detailed analysis of cost behaviour based on an

industial enginee’s evaluation of the inputs euied to cay out a paticula

activity and of the prices of those inputs.

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Document Summary

Cost structure: the relative proportion of fixed, variable, and mixed costs found in an organization. Activity base: a measure of whatever causes a variable cost to be incurred. For example, the total cost of direct materials in a bicycle manufacturing company will increase as the number of bicycles produced increases. Therefore, the number of bicycles produced is an activity base for explaining the total cost of direct materials. Step-variable cost: a cost (such as the cost of a maintenance worker) that is obtainable only in large amounts and that increases and decreases only in response to fairly wide changes in the activity level. Curvilinear costs: costs that show a curved relationship between cost and activity rather than a straight-line relationship. Committed fixed costs: fixed costs that are difficult to adjust in the short term and that relate to the investment in facilities, equipment, and the basic organizational structure of a firm.

Related Questions

King City Specialty Bikes (KCSB) produces high-end bicycles. The unit costs to manufacture and market the bicycles at last year's volume level of 1,850 bicycles per month are shown in the following table:

Unit manufacturing costs
Variable	$238
Fixed	109
Total unit manufacturing costs		$347
Unit nonmanufacturing costs
Variable	59
Fixed	140
Total unit nonmanufacturing costs		199
Total unit costs		$546

KCSB expects to produce and sell 2,250 bicycles per month in the coming year. The bicycles sell for $580 each.

KCSB receives a proposal from an outside contractor who, for $165 per bicycle, will assemble 850 bicycles per month and ship them directly to KCSB's customers as orders are received from KCSB's sales force. KCSB would provide the materials for each bicycle, but the outside contractor would assemble, box, and ship the bicycles. The variable manufacturing costs would be reduced by 35% for the 850 bicycles assembled by the outside contractor, and variable nonmanufacturing costs for the 850 bicycles would be cut by 55%.

KCSB's marketing manager thinks that it could sell 75 specialty racing bicycles per month for $6,000 each, and its production manager thinks that it could use the idle resources to produce each of these bicycles for variable manufacturing costs of $4,800 per bicycle and variable nonmanufacturing costs of $400 per bicycle.

If KCSB accepts the proposal, it would be able to save 10% of fixed manufacturing costs; fixed nonmanufacturing costs would be unchanged.

REQUIRED [Note: Round unit cost computations to the nearest cent]

What is the difference in KCSB's monthly costs between accepting the proposal and rejecting the proposal? ______________ (Note: If the costs of accepting the proposal are less than the costs of rejecting it, enter the difference as a positive number; if the accept costs are more than the reject costs, enter the difference as a negative number.)

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

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.

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AFM102 Chapter Notes - Chapter 3: Fixed Cost, Variable Cost, Income Statement

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