Cost Management Paper 6

Answer (B) is correct. Because of the fixed portion, the per-unit cost of a mixed, or semivariable, cost will decrease as production volume increases.

Answer (C) is correct. The fixed and variable portions of mixed costs may be estimated by identifying the highest and the lowest costs within the relevant range. The difference in cost divided by the difference in activity is the variable rate. Once the variable rate is found, the fixed portion is determinable. The high-low method is a simple approximation of the mixed cost formula. The costs of using more sophisticated methods sometimes outweigh the incremental accuracy achieved. In these cases, the high-low method is sufficient.

Answer (C) is correct. The company’s budget consists of a fixed cost component and a variable cost component. The fixed cost component can be expected to remain constant throughout the budget’s relevant range. The variable cost component, however, will change at a constant rate within the budget’s range. The increase in budgeted cost of $1,200 ($21,000 – $19,800) per 1,000 units of production can therefore be calculated as the variable cost per unit of $1.20 [($21,000 – $19,800) ÷ 1,000] and the total fixed costs of $9,000 [$21,000 – (10,000 × $1.20)]. These costs can then be used to determine the total cost of using 12,000 units of electricity [(12,000 × $1.20) variable + $9,000 fixed].

Answer (B) is correct. First, state the known information mathematically and derive the variable portion of the total: Fixed costs + Variable costs = Total cost $60,000 + Variable costs = $400,000 Variable costs = $340,000 Next, calculate the unit variable cost of $85,000 per office ($340,000 ÷ 4 offices). Total budgeted cost for the upcoming year can now be calculated as $570,000 [($85,000 per office × 6 offices) + $60,000].

Answer (D) is correct. First, it is necessary to find the actual amount of materials used in each unit of finished good, including the evaporated material. Since 4% of the total amount evaporates, an equation can be set up as X oz × 96% = 9 oz. The variable X is 9.375 oz, which is the amount of raw materials input for one unit of finished goods. The evaporated material should be counted since it is normal spoilage, which is spoilage that occurs under normal operating conditions. Normal spoilage conditions are absorbed into the cost of the finished good.The cost per ounce of raw materials is $2.20. This contains the cost to ship each ounce of materials. Any cost necessary to get the material to the production process is included in the cost of direct materials. The total cost of raw materials contained in one unit of finished goods is $20.63, which is the product of $2.20 per ounce and 9.375 ounces per unit.

Answer (C) is correct. Committed costs are those that are required as a result of past decisions.

Answer (A) is correct. Discretionary costs are those that are incurred in the current period at the “discretion” of management and are not required to fill orders by customers

Answer (B) is correct. Controllable costs can be affected by the efforts of a manager.

Answer (A) is correct. Joint products are created from processing a common input. Joint costs are incurred prior to the split-off point and cannot be identified with a particular joint product. As a result, joint costs are irrelevant to the timing of sale. However, separable costs incurred after the split-off point are relevant because, if incremental revenues exceed the separable costs, products should be processed further, not sold at the split-off point.

Answer (B) is correct. Joint products are common products created from processing a single input (e.g., gasoline, diesel fuel, and kerosene). Joint products have common costs until they reach the split-off point. Joint costing assigns common costs to joint products.