The company should calculate the variable cost of its products and compare them with competitors that produce the same product. This calculation helps the company determine if it needs to reduce its variable costs further. In our planning and decision making calculations, we assume that the variable rate stays the same.
Depreciation, insurance, property taxes,
and administrative salaries are examples of fixed costs. Recall
that so-called fixed costs are fixed in the short run but not
necessarily in the long run. This step requires that each data point be plotted on a graph. The x-axis (horizontal axis) reflects the level of activity (units produced in this example), and the y-axis (vertical axis) reflects the total production cost. Figure 2.5 “Scattergraph of Total Mixed Production Costs for Bikes Unlimited” shows a scattergraph for Bikes Unlimited using the data points for 12 months, July through June.
Table 6.10 summarizes how costs behave within their relevant ranges. As defined earlier, the relevant range is a term used to describe the range of activity (units of production in this example) for which cost behavior patterns are likely to be accurate. The relevant range for total production costs at Bikes Unlimited is shown in Figure 2.8 “Relevant Range for Total Production Costs at Bikes Unlimited”. It is up to the cost accountant to determine the relevant range and make clear to management that estimates being made for activity outside of the relevant range must be analyzed carefully for accuracy. For example, let’s say Bikes Unlimited picks up a large contract with a customer that requires producing an additional 30,000 units per month. Do you think the cost equations in Table 2.5 “Cost Equations for Bikes Unlimited” would lead to accurate cost estimates?
They include the fixed portion of mixed costs with other fixed costs, while assuming the variable part changes with volume. We will look at ways to separate fixed and variable components of a mixed cost later in the chapter. If the total direct labor cost increases as the volume of output increases and decreases as volume decreases, direct labor is a variable cost. Piecework pay is an excellent example of direct labor as a variable cost.
All these costs will change because the estimates are accurate only in the short term. Note that regardless of the activity level, total fixed costs remain the same. Table 5.2 provides the total and per unit fixed costs at three different levels of production, and Figure 5.2 graphs the relation of total fixed costs (y-axis) to units produced (x-axis). A variable cost1 describes a cost that varies in total with changes in volume of activity. The activity in this example is the number of bikes produced and sold.
For instance, wages often act as a stepped variable cost when employees are paid a flat salary and a commission or when the company pays overtime. Further, when additional machinery or equipment is placed into service, businesses will see their fixed costs stepped up. Graphically, step costs appear like stair steps (Figure 6.34). A cost that changes with the level of activity but is not linear is classified as a stepped cost. The range over which these costs remain unchanged (fixed) is referred to as the relevant range, which is defined as a specific activity level that is bounded by a minimum and maximum amount. Graphically, step costs appear like stair steps (Figure 2.21).
Accruing tax liabilities in accounting involves recognizing and recording taxes that a company owes but has not yet paid. This is important for accurate financial reporting and compliance with… Using a new Excel spreadsheet, enter the data points in two columns. The monthly data in Table 2.4 “Monthly Production Costs for Bikes Unlimited” includes Total what is the energy tax credit for 2020, 2021 how to claim and qualify Production Costs and Units Produced. Thus use one column (column A) to enter Total Production Costs data and another column (column B) to enter Units Produced data. Looking at this analysis, it is clear that, if there is an activity that you think that you cannot afford, it can become less expensive if you are creative in your cost-sharing techniques.
In any business setup, processes change overtime and the best way to overcome any unprecedented changes in the most appropriate way is to be well prepared in advance about the future outcomes. One such aspect which gets impacted with changes is cost behaviour. “Profitability is just around the corner.” This is a common expression in the business world. Business is tough, profits are illusive, and competition has a habit of moving into areas where profits are available.
However, he can consider this fixed cost on a per-unit basis, as shown in Figure 6.25. In the electronic parts example, it was illustrated how such costs can vary based on quantities ordered. Perhaps one might order and store large quantities of the part for use in future periods.
Cost functions are descriptions of how a cost (e.g., material, labor, or overhead) changes with changes in the level of activity relating to that cost. For example, total variable costs will change in relation to increased activity, while fixed costs will remain the same. The change in total costs in response to the change in some activity. For example, some of the costs of owning and operating a vehicle will increase in total with an increase in miles driven.
You’ve also learned that direct labor is the work of the employees who are directly involved in the production of goods or services. In fact, for many industries, the largest cost incurred in the production process is labor. For Carolina Yachts, their direct labor would include the wages paid to the carpenters, painters, electricians, and welders who build the boats. Like direct materials, direct labor is typically treated as a variable cost because it varies with the level of activity.
The high‐low method divides the change in costs for the highest and lowest levels of activity by the change in units for the highest and lowest levels of activity to estimate variable costs. The high point of activity is 75,000 gallons and the low point is 32,000 gallons. It was calculated by dividing $7,000 ($20,000 – $13,000) by 43,000 (75,000 – 32,000) gallons of water.
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