Explain the cost-behavior patterns of variable and fixed cost. Give an example o

Question

Explain the cost-behavior patterns of variable and fixed cost. Give an example of each. Jones and Heather started the JH Widget Company in 2014 to manufacture widgets. They rented a building, bought equipment, and hired employees to work full time at fixed monthly salaries. Utilities and other operating charges remained fairly constant during each month. JH Widget Company sells each widget at $70 each. JH paid fixed costs of $5,850 per month and variable costs of $25 per widget. Jones and Heather are concerned about the break-even and probability. Using the equation method to do your calculations, explain to Jones and Heather how many widgets must be sold, and the totals sales revenue that must be reached, in order to breakeven. The president of the Gulf Coast Refining Corporation wants to know why his golfing partner, who is the chief financial officer of a large construction company calculates his costs by the job when his own corporation calculates costs by large units, rather than by individual ban el of oil. Explain how activity-based costing systems can provide more accurate product costs than traditional cost systems

Explanation / Answer

Answer:

1. A variable cost pattern describes a cost that varies in total with changes in volume of activity. The activity in this example is the number of bikes produced and sold.However, the activity can take amny different forms depending on the organization. The two most common variable cost are direct materials and direct labor.

   A fixed cost pattern describes a cost that is fixed in total with changes in volume of activity. assuming the activity is the numaber of bikes produced and sold, Examples of fixed cost includes salaried peronnel, Building rent and insurance.

4. When using the activity based costing, a manufacturer has a more accurate picture of what it costs to make each product. This allow easier interpretation for internal management to base decision on. Activity based cost system also provide a better understanding of the overhead costs involved in making the product.

traditional costing methods donot include the manufacturing costs involved in producing the product.Therefore not giving an accurate cost guide. However, the traditional method is used most often.External financial statement utilize the tarditional method to provide a value of the cost of goods. However using only the traditional cost method can lead to determental amangement decision since it excludes the full cost of manufacturing the product.Activity based costing methods improve the overhead costs associated with both the cost and cause, makingit a much more flexible accounting option.

3. Oil refineries use process costing to calculate their costs per barrel of oil. Each barrel of oil essentially the same.Thus, costs are accumulated for all the oil processed during a given period of time and the total costs are divided by the barrels of oil produced. an average cost is calculated. since the costs to actully produce the oil are essentially the same, accuracy is not lost by this process.

The construction company calculates costs by each job, since each job can require substantially different amount of the various inputs. Thus, the cost of each job could be radically different from the other jobs.gets

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