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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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Identifying Fixed, Variable, Mixed, and Step Costs Consider each of the following independent situations:

  1. a. A computer service agreement in which a company pays $150 per month and $15 per hour of technical time
  2. b. Fuel cost of the company’s fleet of motor vehicles
  3. c. The cost of beer for a bar
  4. d. The cost of computer printers and copiers at your college
  5. e. Rent for a dental office
  6. f. The salary of a receptionist in a law firm
  7. g. The wages of counter help in a fast-food restaurant
  8. h. The salaries of dental hygienists in a three-dentist office. One hygienist can take care of 120 cleanings per month.
  9. i. Electricity cost which includes a $15 per month billing charge and an additional amount depending on the number of kilowatt-hours used

Required:

  1. 1. For each situation, describe the cost as one of the following: fixed cost, variable cost, mixed cost, or step cost. (Hint: First, consider what the driver or output measure is. If additional assumptions are necessary to support your cost type decision, be sure to write them down.)

    Example: Raw materials used in production—Variable cost

  2. 2. CONCEPTUAL CONNECTION Change your assumption(s) for each situation so that the cost type changes to a different cost type. List the new cost type and the changed assumption(s) that gave rise to it.

    Example: Raw materials used in production. Changed assumption—the materials are difficult to obtain, and a year’s worth must be contracted for in advance. Now, this is a fixed cost. (This is the case with diamond sales by DeBeers Inc. to its sightholders. See the following website for information: www.keyguide.net/sightholders/.)

1.

To determine

Identify the type of cost in each situation and also explain the reason that supports the cost type decision.

Explanation

Cost:

Cost can be defined as the cash and cash equivalent which is incurred by the organization to produce products or its related services which will benefit the organization in the future.

Fixed Cost:

Fixed cost is the cost which is not affected by the change in level of output to produce goods and services in a relevant range.

Variable Cost:

Variable cost is the cost which varies due to the changes in the level of output to produce products and services in a relevant range.

Mixed Cost:

The cost which is partially fixed and partially variable in nature is known as mixed cost. In other words, mixed cost is the combination of more than one type of cost.

Step Cost:

Step cost is the cost that remains constant for a particular output level and then jumped to a higher cost when the output level is changed and reached to another range.

Type of costs in a given situation is shown below:

 SituationType of CostReasons and Assumptions
a..As per computer service agreement, the company pays $150 per month and $15 per hour.Mixed CostThe company pays $150 per month which is not changed or remains fixed and $15 per hour which is variable in nature.
b.Fuel cost of the company’s fleet of motor vehicle.Variable CostFuel cost varies if the number of motor vehicles increases.
c...

2.

To determine

Identify the type of cost in each situation after changing the assumptions taken in previous part.

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