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    Mba 205 Cost Behavior Discussion Problems

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    The document discusses variable costs, fixed costs, and mixed costs. It defines variable costs as changing proportionally with activity level, fixed costs as remaining constant despite activity changes, and mixed costs as containing both fixed and variable portions. The document also provides examples of cost analysis methods like scattergraph, high-low, and contribution margin calculations in income statements. Discussion problems provide examples of using these concepts and methods to analyze cost data for various companies.

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    Mba 205 Cost Behavior Discussion Problems

    Uploaded by

    asedhajdvbuaaaa
    32 views5 pages
    The document discusses variable costs, fixed costs, and mixed costs. It defines variable costs as changing proportionally with activity level, fixed costs as remaining constant despite activity changes, and mixed costs as containing both fixed and variable portions. The document also provides examples of cost analysis methods like scattergraph, high-low, and contribution margin calculations in income statements. Discussion problems provide examples of using these concepts and methods to analyze cost data for various companies.

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    Cost Behavior Discussion Problems

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    The document discusses variable costs, fixed costs, and mixed costs. It defines variable costs as changing proportionally with activity level, fixed costs as remaining constant despite activity changes, and mixed costs as containing both fixed and variable portions. The document also provides examples of cost analysis methods like scattergraph, high-low, and contribution margin calculations in income statements. Discussion problems provide examples of using these concepts and methods to analyze cost data for various companies.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    32 views5 pages

    Mba 205 Cost Behavior Discussion Problems

    Uploaded by

    asedhajdvbuaaaa
    The document discusses variable costs, fixed costs, and mixed costs. It defines variable costs as changing proportionally with activity level, fixed costs as remaining constant despite activity changes, and mixed costs as containing both fixed and variable portions. The document also provides examples of cost analysis methods like scattergraph, high-low, and contribution margin calculations in income statements. Discussion problems provide examples of using these concepts and methods to analyze cost data for various companies.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 5

    Module 3: Cost Behavior (Variable and Fixed)

    Refer to the table below to see and understand the difference between variable and fixed costs.
     

    COST Per unit  In Total

    varies in proportion with


    Variable remains constant
    the level of activity

    varies inversely with the


    Fixed remains constant
    level of activity

    The types of costs according to behavior have sub-types. 


     
    VARIABLE COST
    A variable cost is a cost where the total amount changes in direct proportion with the level of
    activity within the relevant range. A cost driver is the one that causes the variable cost to be
    incurred. Examples of this cost driver include: units produced, machine hours, miles driven and
    labor hours.
    The following are the two types of variable costs:
    1. True variable cost- the total costs change whenever there is a change in the level of activity
    2. Step variable cost- there will be a change in the cost if the change is beyond the range. Slight
    changes do not affect the cost.
     
    FIXED COST
    A fixed cost is a cost that does not change even when there is a change in the level of activity.
    Please refer to the Powerpoint presentation for the examples.
    There are two types of fixed costs, namely:
    1. Committed fixed costs- these are long term costs that cannot be significantly reduced in the
    short-term
    2. Discretionary fixed costs- these costs may be altered in the short-tern by current managerial
    decisions
     MIXED COST
    A mixed cost contains both variable and fixed portions. Mixed cost is depicted by the equation:
    Y = a +bX

    Y= The total mixed cost.

    a= The total fixed cost (the vertical intercept of


    the line).

    b= The variable cost per unit of activity (the slope


    of the line).

    X= The level of activity.


    SCATTERGRAPH
    The scattergraph method is done by plotting the data points on a graph. Then, draw a line
    through the data points with about an equal numbers of points above and below the line. Next,
    use one data point to estimate the total level of activity and the total cost.
     
    HIGH-LOW METHOD
    High-low method is a method used to analyze mixed cost. It is used to estimate the variable and
    fixed portions of the the total costs.  These are the steps to follow in using high-low method:
    1. Identify the highest and lowest points.
    2. Compute the variable cost per unit (or per hour) using this formula:
         Highest Cost - Lowest Cost       
    Highest Activity- Lowest Activity
    3. Compute the fixed cost portion by using either the highest point or lowest point. (You will
    arrive at the same answer)
    4. Present the cost formula.
    5. Apply the cost formula.
    Contribution Margin
    In some management decisions, the presentation of income and expenses is modified into
    contribution format. In this format, costs are classified into variable and fixed. The contribution
    format of income statement is presented as follows:

    Sales Pxx

    Less: Variable costs xx

    Equals: Contribution
    Pxx
    Margin

    Less: Fixed Costs xx

    Equals: Net Income Pxx

    From this formula, we can derive the definition (and use) of the contribution margin. 
    1. It is the excess amount of sales after deducting the variable costs.
    2. It the the amount used to cover the fixed costs.
    3. It is the amount that "contributes" to your profit. Hence, it is called contribution margin.
    DISCUSSION PROBLEMS:

    Contribution Format Income Statement

    1. In March, Branford Corporation, a manufacturing company, reported the following financial


    data:

       

    Required:

    Prepare an income statement in good form for March using the contribution approach. 

    2. Sibrel Inc., a manufacturing company, has provided the following financial data for
    September:

       

    The company had no beginning or ending inventories.

    Required:

    a. Prepare an income statement in good form for September using the traditional approach.
    b. Prepare an income statement in good form for September using the contribution approach. 
       

    3. Wigley Inc. has provided the following data concerning its maintenance costs:

       

    Management believes that maintenance cost is a mixed cost that depends on machine-hours.

    Required:

    Estimate the variable cost per machine-hour and the fixed cost per month using the high-low
    method. Show your work! 

       

    Variable cost = Change in cost     Change in activity


    = ($37,098 - $36,612)  /  (4,833 - 4,743) = $5.40
    Fixed cost element = Total cost - Variable cost element
    = $36,612 - ($5.40 x 4,743) = $11,000

    4. Unified Parcel, Inc., operates a local parcel delivery service. The company keeps detailed
    records relating to operating costs of trucks, and has found that if a truck is driven 110,000 miles
    per year the operating cost is 7.5 cents per mile. This cost increases to 8.75 cents per mile if a
    truck is driven 60,000 miles per year.

    Required:

    Estimate the cost formula for truck operating costs using the high-low method. 

    Total cost at high level of activity: 110,000 x $0.075 = $8,250


    Total cost at low level of activity: 60,000 x $0.0875 = $5,250

       

    Variable cost = Change in cost     Change in activity


    = $3,000  /  50,000 miles = $0.06 per mile

    Fixed cost element =

    $8,250 - ($0.06 per mile x 110,000 miles) = $1,650

    The cost formula is $1,650 per year plus $0.06 per mile.

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