Cost Behavior Analysis

Total contribution needed to cover the old fixed costs + new fixed cost + profit is just the three factors added together.

Fixed costs are what it costs a company to run before they make any products irrespective of the level of activity e.g. rent & rates, insurance, salaries, utilities.

The Law of diminishing returns states that if one factor of production is increased while the others remain constant, the overall returns will relatively decrease after a certain point. The total fixed cost is the same regardless of the output; the total variable costs will change with the level of output resulting in the total cost as the sum of the fixed cost and variable cost at each level of output. Over the 0 to 4 range of output, the TVC and TC curves slope upward. They reflect a decreasing rate due to the increasing minor returns. The slopes curves will increase due to these diminishing marginal returns.

Unit Break-even Volume = Total Fixed Costs/Contribution per unit = $525,000 - $6.40 = 82,031.25units

Under a traditional system, overhead cost is allocated to an activity based on hours or rates for direct labor or machine usage. However, this approach does not clearly indicate how much overhead cost will be needed in order to complete a job through a particular function. ABC methodology is to be used as an alternative to traditional accounting where a business 's overhead costs (indirect costs such as electrical energy consumption for heating or cooling, or indirect cost associated with marketing) are allocated as a proportion of direct costs, to an activity. This approach is unsatisfactory because there can be cases where two activities could absorb the same direct costs

The cost of OS-367 may have increased under the ABC system due to the fact that it the cost of the product needed to be increased to cover all the overhead costs. Activity based costing allocates costs to different areas based on the actual product and service in relation to consumption. Traditional cost allocation allows the company to divide the costs by department and utilizes volume- based information to determine the allocations. Therefore, OS-367 may be the only product that needs a certain machine to be produced and the cost of that machine would be allocated to this certain product. In this scenario, it increased the overhead costs and total cost allocated (ABC), thus the cost per unit needed to be increased. The increase in cost per

Birth Company normally produces and sells 30,000 units of RG-6 each month. RG-6 is a small electrical relay used as a component part in the automotive industry. The selling price is $ 22 per unit, variable costs are $ 14 per unit. Fixed manufacturing overhead costs total $ 1, 50,000 per month, and fixed selling costs total $ 30,000 per month.

Variable costs apply at a per unit basis, only the behavior of the variable per unit cost is different. For example, if supplies for a one lab test cost $10, the variable cost per test remains constant. Although the cost of the test remains the same, the total costs associated with the test will increase or decrease in relation with the volume of tests at the hospital.

3. Computation of unit costs. (Round Cost per unit to 2 decimal places. Omit the "$" sign in your

22. Variable costs ________. A. are fixed per unit and vary in total B. are fixed in

cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the

For example, the cost of the factory will be the same regardless of the number of units produced within the factory. Notice here we are talking about the fixed cost in relation to the level of activity, if we produce one unit or 100 units the cost will remain the same, but that does not mean the cost will remain fixed from one year to the next as it may rise or fall over time due to inflation for instance. Add to that, per unit cost varies with the level of activity. If the volume of production increased, the fixed cost per unit decreases and vice versa when volume of production decreases, the fixed cost per unit increases. In other words, there is an inverse relation between the cost and the level of activity on a per unit basis which is known as economy of scale (a proportionate saving in costs gained by an increased level of production – Oxford

Cost behaviour is the manner in which different costs respond to variations in volume or activity (Crosson, 2014). Effective cost control is impossible without proper understanding of cost behaviour. These costs could be variable, fixed, or mixed. Gouna Limited therefore needs to understand how certain costs behave in order to control them well for a positive outcome. Through the

On the other hand, fixed costs remain constant with little regard to the level of production being realized. A good example of fixed costs is rent. Of course there are exceptions, but whether or not a company is using the full capacity of the facility it is renting, the rent will still become due. However, a positive characteristic of fixed costs is that they usually remain constant; and so everything that

The computation of equivalent units under FIFO method differs from weighted average method in two ways. First the units transferred out figure are divided into two parts. One part consists of the units from beginning inventory that were completed and transferred out, and the other part consists of the units that were both started and completed during the current period. Second full consideration is given to the amount of work expended during the current period on units in the beginning work in process inventory as well as units the ending inventory. Thus, under the FIFO method, it is necessary to convert both beginning and ending inventories to an equivalent unit basis. For the beginning inventory, the equivalent units represent the work done to complete the units; for the ending inventory, the equivalent units represent the work done to bring the units to a stage of partial completion at the end of the period (the same as with the weighted average method). The formula for computing equivalent units of production is more complex under FIFO method than under weighted average