Acc 132 Chapter 3

Turquoise Company manufactures travel bags. The high output occurred in May, with 800 units produced at a total cost of $8,200. The low output was in January, with 200 units produced at a total cost of $2,800. Determine the variable rate by using the high and low points.

$ 9.00 Variable Rate = (High Point Cost - Low Point Cost) ÷ (High Point Output - Low Point Output) Variable Rate = ($8,200 − $2,800) ÷ (800 - 200) = $5,400 ÷ 600 = $9.00

Variable costing

-stresses the difference between fixed and variable manufacturing costs -assigns only variable manufacturing costs to the product; these costs include direct materials, direct labor, and variable overhead

Which of these is NOT a commonly used method of separating a mixed cost into its fixed and variable components? A.First-In, First Out B. High-low method C. Scattergraph method D. Method of Least Squares

A.

Which of the following statements is true of absorption costing? a. It is used only for internal reporting purposes. b. It assigns all manufacturing costs to the product. c. It treats fixed selling overhead as a product cost. d. It treats fixed manufacturing overhead as a period cost.

B. Absorption costing assigns all manufacturing costs to a product. Under absorption costing, fixed overhead is viewed as a product cost, not a period cost.

Mixed costs

Both fixed and variable costs Ex) Overhead for a company may consist of a fixed supervisor salary plus the cost of supplies that vary with the quantity of output produced

The purpose of creating a cost formula is to provide: a. a qualitative estimate of only the variable cost per unit of the cost drivers. b. a qualitative estimate of both total fixed costs and the variable cost per unit of the cost drivers. c. a quantitative estimate of both total fixed costs and the variable cost per unit of the cost drivers. d. a quantitative estimate of only the total fixed costs of the cost drivers.

C. The purpose of creating a cost formula is to provide a quantitative estimate of both total fixed costs and the variable cost per unit of the cost drivers.

Fixed cost

Cost that does not change in total as output changes

Which of these statements is FALSE? A. A cost driver is a causal factor that measures the output of the activity that leads costs to change B. The number of computers processed is called the output measure or driver C. Many managers refer to an independent variable as a cost driver D. Many managers refer to a dependent variable as a cost driver

D.

Discretionary and committed fixed costs

D: fixed costs that can be changed or avoided relatively easily in the short run at management discretion C: Fixed costs that cannot be easily changed

Variable cost

Increases in total with an increase in output and decreases in total with decrease in output

High- low method

method of separating mixed costs into fixed and variable components by using just the high and low data points VR= (High point cost - low point cost)/(High point output-Low point output)

Cost behavior

the foundation upon which managerial accounting is built

Mahogany Company manufactures computer keyboards. The total cost of producing 15,000 keyboards is $450,000. The total fixed cost amounts to $150,000. Determine the total cost of manufacturing 25,000 keyboards.

$650,000....Total Variable Cost = Variable Rate × Units of Output Variable Rate = Total Variable Cost ÷ Units of Output = ($450,000 - $150,000) ÷ 15,000 = $20 per keyboard Total cost of manufacturing 25,000 keyboards = Fixed Cost + Variable Cost= $150,000 + ($20 × 25,000) = $650,000

The cost of purchase of plant and equipment is an example of a(n): a. committed fixed cost. b. discretionary fixed cost. c. discretionary variable cost. d. unavoidable variable cost.

A. The cost of purchase of plant and equipment is an example of a committed fixed cost. Fixed costs such as purchase of property, plant, and equipment cannot be easily changed.

When the level of output increases within the relevant range, _____. a. fixed cost per unit does not change, but the variable cost per unit decreases b. fixed cost per unit decreases, but the variable cost per unit does not change c. both fixed cost per unit and variable cost per unit do not change d. both fixed cost per unit and variable cost per unit decrease

B. If the output increases, fixed costs per unit will decrease because fixed costs will be divided by more units. Variable costs per unit will always stay the same.

Gamma Company manufactures power transmission grids. It has 5 sales representatives, each earning a salary of $40,000 plus a commission of $200 per grid sold. The total cost associated with the sales representatives is an example of a: a. fixed cost. b. mixed cost. c. variable cost. d. step cost.

B. Mixed costs are costs that have both a fixed and a variable component. Sales representatives being paid a salary plus a commission on sales is an example of a mixed cost.

In the mixed cost equation: Total Cost = Fixed Cost + (Variable Rate × Units of Output), the dependent variable is _____. a. units of output b. total cost c. variable rate d. fixed cost

B. The dependent variable is total cost. The dependent variable depends on or is caused by the independent variable. In this case, total cost depends on both the fixed and variable costs.

The difference between variable costing and absorption costing hinges on the treatment of: a. variable selling overhead. b. variable manufacturing overhead. c. fixed selling overhead. d. fixed manufacturing overhead.

D. The difference between variable costing and absorption costing hinges on the treatment of one particular cost—fixed manufacturing overhead.

Two types of fixed costs

Discretionary and commited

Classify the resource costs as variable or fixed. Cost of food and decorations for the annual Fourth of July party for all factory employees

Fixed

Classify the resource costs as variable or fixed. Depreciation on the factory

Fixed

Classify the resource costs as variable or fixed. Salary of the factory receptionist

Fixed

Classify the resource costs as variable or fixed. Depreciation on a forklift used to move partially completed goods

Fixed

Classify the resource costs as variable or fixed. Wages paid to workers who maintain the factory equipment

Fixed

Expression of cost as an equation for a straight line is

Total cost = Total Fixed Cost + (Variable Rate x Units of Output)

Total cost=

Total fixed cost+ Total Variable cost

Classify the resource costs as variable or fixed. Cloth to cover the futon mattress

Variable

Classify the resource costs as variable or fixed. Fuel for a forklift used to move materials in a factory

Variable

Classify the resource costs as variable or fixed. Power to operate a drill (to drill holes in the wooden frames of the futons)

Variable

Classify the resource costs as variable or fixed. Cloth rags used to wipe the excess stain off the wooden frames

Variable

Classify the resource costs as variable or fixed. Wages paid to workers who assemble the futon frame

Variable

Absorption cost

assigns all manufacturing costs to the product Direct materials, direct labor, variable overhead, and fixed overhead define the cost of a product

Cost Driver

causal factor that measures the output of the activity that leads (or causes) costs to change Direct labor hours worked Number of customer contacts Number of engineering change orders issued Number of machine hours used Number of product returns from customers