Understanding how costs behave can help managers plan operations and choose between various courses of action Answer
Understanding how costs behave can help managers plan operations and choose between various courses of action.
Part (a) Identify and describe the three types of cost behavior, including examples of each.
Fixed, variable and semi variable
are three behaviors. The fixed cost
remain constant in total and is not affected by change in volume of activity
for a specific range, for example, rent of a factory is $20000 with a
production capacity of 50000 units, it means that if company produces 20000
units or 30000 units, the rent will remain the same. The variable cost varies in total with change
in volume of activity, for example, each shirt need 2 meters of cloth @$20 per
meter, it means that the cost of cloth for each shirt is $40 and for two
shirts, it will be $80 and so on. The
semi variable cost has some portion fixed and some portion variable. For example, the utility bill, in which a
certain amount is to be paid on monthly basis, whether the utility is used or
not, while another cost is to be paid according to the usage of utility. For example, if monthly rent for a telephone
bill is $50 and the call charges is 50 cents per minute and in a month 100
minutes are used then the telephone bill will be $50 for monthly charges and
$50 for call charges, the total bill will be $100, which is neither fixed nor
variable.
| Part (b) As a manager, which cost behavior would you prefer and why? (Points : 20) I would prefer the variable cost as it will incur if activity is to be done, otherwise not, therefore it makes the decision process easier. If a selling price covers the variable cost, the the order should be accepted, this type of decision can be taken easily by using variable cost. 3. (TCO 6) Yappy Company is considering a capital investment of $320,000 in additional equipment. The new equipment is expected to have a useful life of 8 years with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual net income and cash inflows are expected to be $25,000 and $65,000, respectively. Yappy requires a 10% return on all new investments. Part (a) Compute each of the following: 4. (TCO 7) Roswell Company has budgeted sales revenue as follows for the next 4 months as follows: February $150,000 March $120,000 April $105,000 May $165,000 Past experience indicates that 80% of sales each month are on credit and that collection of credit sales occurs as follows: 60% in the month of sale, 35% in the month following the sale, and 3% in the second month following the sale. The other 2% is uncollectible. Prepare a schedule which shows expected cash receipts from sales for the month of May. (Points : 30) May Cash sales 33000 165000*.2 60% of May credit sales 79200 165000*.8*.6 35% Of April credit sales 29400 105000*.8*.35 3% of March credit sales 2880 120000*.8*.03 Total collection in May 144480 Product Budgeted Sales Actual Sales A 35,300 units at $2.00 per unit 32,700 units at $2.60 per unit B 27,900 units at $5.00 per unit 29,200 units at $4.70 per unit Part (a) Calculate the sales volume variance. 35300-32700*2 -5200 Unfavorable 27900-29200*5 6500 favorable Sales volume variance 1300 favorable 6. (TCO 9) The Mays Clinic has the following monthly telephone records and costs: Calls Costs 2,000 $2,400 1,500 2,000 2,200 2,600 2,500 2,900 2,300 2,700 1,700 2,200 Identify the fixed and variable cost elements using the high-low method. (Points : 30) High 2500 2900 Low 1500 2000 Difference 1000 900 Variable cost per call 900/1000 $ 0.90 Total cost for 2500 calls $ 2,900 less variable cost $ 2,250 Fixed cost $ 650 |
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