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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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In the cost formula, the term $128,000,000

  1. a. is the total variable cost.
  2. b. is the dependent variable.
  3. c. is the variable rate.
  4. d. is the total fixed cost.
  5. e. cannot be determined from the above formula.

Use the following information for Multiple-Choice Questions 3-4 through 3-7:

The following cost formula was developed by using monthly data for a hospital.

Total Cost = $128,000,000 + ($12,000 × Number of Patient Days)

To determine

Identify the type of cost in the given cost formula.

Explanation

Fixed Cost:

Fixed cost is the cost which is not affected by the change in level of output. It remains unchanged in the short run, for example, property taxes, rent and salaries.

d.

Variable cost is the cost which changes with the change in the level of output. In other words, variable cost increases with the increase in units produced and decreases with the decrease in units produced.

The equation in brackets represents variable cost as the amount of $12,000 represents the variable rate of average patient days. If the number of day’s patient admitted increases then the variable cost also increases with $12,000 per unit. Total cost comprises fixed cost and variable cost. The cost of $128,000,000 in the given formula represents the fixed cost...

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