Cost terminology and cost behaviors and exercises solution
Classify each of the following costs
incurred in manufacturing bicycles as variable (V), fi xed (F), or mixed (M) cost (using
number of units produced as the activity measure). Also indicate whether the cost is
direct material (DM), direct labor (DL), or overhead (OH).
a. Factory supervision
b. Aluminum tubing
c. Rims
d. Emblem
e. Gearbox
f. Straight-line depreciation on painting machine
g. Fenders
h. Raw material inventory clerk’s wages
i. Quality control inspector’s salary
j. Handlebars
k. Metal worker’s wages
l. Roller chain
m. Spokes (assuming cost is considered signifi cant)
n. Paint (assuming cost is considered signifi cant)
Sure! Let's start by discussing cost terminology and cost behaviors.
Cost Terminology:
1. Fixed Costs: These costs do not change with changes in the level of activity or production. Examples include rent, salaries of employees, and insurance premiums.
2. Variable Costs: These costs vary in direct proportion to changes in the level of activity or production. Examples include raw material costs, direct labor, and sales commissions.
3. Semi-Variable Costs: Also known as mixed costs, these costs have both fixed and variable components. Examples include utility bills, where there is a fixed component (e.g., a monthly service charge) and a variable component (e.g., usage-based charges).
4. Direct Costs: These costs are directly attributable to a specific product, service, or project. Examples include the cost of raw materials used or direct labor involved in producing a product.
5. Indirect Costs: Also known as overhead costs, these costs are not directly traceable to a specific product or service but are necessary for the overall operation of a business. Examples include factory rent, administrative expenses, and depreciation of equipment.
Cost Behaviors:
1. Fixed Cost Behavior: Fixed costs remain constant in total within a relevant range of activity or production levels but decrease on a per-unit basis as production increases. The cost per unit decreases because it is spread over a larger number of units.
2. Variable Cost Behavior: Variable costs change proportionately with changes in the level of activity or production. The total cost remains constant per unit regardless of production levels.
3. Semi-Variable Cost Behavior: Semi-variable costs have both a fixed and variable element. The fixed portion of the cost remains constant, while the variable portion changes with the level of activity or production.
Now, let's move on to exercises solving various cost-related problems.
Exercise:
1. Calculate the total cost:
Suppose a company incurs a monthly fixed cost of $5,000 and a variable cost of $10 per unit. Calculate the total cost when the company produces 500 units.
Solution:
Total Cost = Fixed Cost + (Variable Cost per unit * Number of units)
Total Cost = $5,000 + ($10 * 500)
Total Cost = $5,000 + $5,000
Total Cost = $10,000
2. Determine the unit cost:
A company produces 1,000 units with total costs of $15,000. Calculate the unit cost.
Solution:
Unit Cost = Total Cost / Number of units
Unit Cost = $15,000 / 1,000
Unit Cost = $15
3. Calculate the break-even point:
A company has fixed costs of $20,000 and a variable cost per unit of $8. Determine the break-even point in units.
Solution:
Break-even Point (in units) = Fixed Costs / (Selling Price per unit - Variable Cost per unit)
Break-even Point = $20,000 / ($8 - $8) = Undefined (since the selling price per unit is not given)
I hope these explanations and exercises help you understand cost terminology and cost behaviors better. Let me know if you have any further questions!