Phase 2 Individual Project Assignment Example | Topics and Well Written Essays - 2000 words

Phase 2 Individual Project - Assignment Example The primary objective of this case study is (a) to define fixed, variable, and mixed costs; (b) to determine cost behaviour patterns, and (c) to explain how these different patterns affect operating and pricing decisions. II.Cost Analysis a. Definition of Variable Costs + Example All expenses incurred that increase as the Production Output and Sales increases and decreases whenever the Production Output and Sales decreases should be considered as variable costs. Albrecht, Steve W., et.al.(2010, p.1062) defined variable costs in a more general way by saying that they are the costs that change in total in direct proportion to changes in activity level.. In the SAC operations, an example of the variable cost would be Raw Materials. The higher the demand for the product which would be evident in the increase in Sales volume, the higher the required Production Output, and a corresponding set of Raw Materials will be needed to produce the desired order quantity. b. Definition of Fixed Cost s + Example All expenses that are incurred whether or not operations are at high or low level should be called Fixed Costs. Rich, J.S., et. al. (2009, p.757) defined fixed cost as constant costs â€Å"within the relevant range as the level of of output increases or decreases.† At SAC, an example of that fixed cost is Depreciation Expense – Factory. Each month, whether or not the factory produces for high demand or for low demand, the value of depreciation expense will not change. c. Definition of Mixed Costs + Example Some costs known as mixed costs are made up of a combination of fixed cost and variable cost. Weygandt, J.J. et.al. (2009, p.209) teaches the need to separate these two in order to properly perform a cost-volume-profit analysis. Kinney, M.R. and Raiborn, C.A. (2012, p.70) also refers to the â€Å"high-low method† of determinine variable costs per unit and then separating it from fixed costs. That is, the formula to determine the portion that is var iable in a mixed costshould be as follows: Cost at High Level of Operations less Cost at Low Level Operations divided by High Activity Level expressed in volume of production or sales less Low Activity Level also expressed in volume of production or sales. The result will be the variable cost per unit within that mixed cost. Variable Costs may then be computed for its total and then separated from the total mixed cost in order to arrive at the fixed cost total within the mixed cost. In the case of SAC, there are data from two years, 2005 and 2006. Cost of Goods sold in 2005 was 50.81% whereas in 2006, the percentage increased to 59.30%. This means Cost of Goods Sold (CGS) may not be considered as 100% variable costs. A closer look at the details of CGS in the 2006 journal entries shows the following accounts: Cost of Goods Sold Raw Materials Labor Overhead Classification: Fixed, Variable, Mixed Supplies-Factory 3,500 MC Insurance-Factory 800 FC Indirect Labor 16,000 MC Factory Salar ies 12,500 FC Factory Property Tax 7,500 FC Maintenance Expense- Factory 8,700 FC Depreciation Expense-Factory 1,600 FC Utilities- Factory 3,650 MC Raw Materials RM, beg.=19,360 Purchases=33,710 RM, end= 10,000 RM, used 43,070 WIP, beg.= 1,800 RM processed = 41,270 WIP,end= 7,000 FG added=34,270 FG,beg.= 25,360 FG,total= 59,630 FG,end= 36,360 FG,sold= 23,270 VC Direct Labor 8,500 VC Selling Expenses 1,560 MC Admin.