ACCOUNTING FOR BUSINESS RESTUDY

Accounting for Business Restudy

THE BEHAVIOUR OF COSTS PORTFOLIO TASK

You are required to show by means of a sketch, a separate graph of cost behaviour patterns for each of the listed items of expense. You should indicate the axis of each graph clearly.

1. Machine rental cost, £100 fixed charge every month, £10 paid for every machine hour worked each month, subject to a maximum monthly charge of £600.

2. Royalty - £0.10 per unit produced, with a maximum charge of £5,000 per annum

3. Warehouse rental of £5000 per month.

4. For production up to 50 units, only one supervisor is required but for production between 50 and 100 units, two supervisors are required. For every additional 50 units thereafter an additional supervisor is required. The cost of one supervisor is £18,000; the cost for two supervisors is therefore £36,000 and so on.

5. Sales commission, which amounts to 2% of sales turnover.

6. Cost of a service - a standing charge for each period plus a charge for each unit of electricity consumed.

The drivers of the cost are identified on the basis of operations carried by the company in its operations. Normally cost drivers are related either to the volume of production or the complexity of the production or marketing process. Few common cost drivers are stated below in the table.

Machine hours used

Computer time used

Labor hours or labor costs incurred

Number of items produced or sold

Pounds of material handled

Clients served

Typed pages

Flight hours completed

Preparation time (set-ups) of the machines

Performed Operations

Completed purchase orders

Orders scrap / rework completed

Quality inspections conducted

Hours spent in testing

Number of parts installed in a product

Different number of clients served

The best driver of cost is one that is casually related to the cost that is being assigned. Find a basis of allocation that coincidentally related to the cost is commonly impossible. With a system of activity-based costing, the choice of allocation base or cost driver is commonly easier because we use a measure of business volume. For example, a reasonable basis of allocation for the costs of preparation of a machine (set-up costs) is machine preparation times (hours of set-up). Note that many drivers of cost in the above table refer to an activity (Mansuy, 1993, p. 67).

CLASSIFICATION OF COSTS PORTFOLIO TASK

Question One

Sunway Limited has recorded the following total costs over the past months:

 

   

Month

Output (units)

Total Cost (£)

Jan

26

6.566

Feb

30

6,510

Mar

33

6.800

Apr

44

6,985

May

48

7,380

Jun

50

7.310

Estimate Sunway Limited's fixed costs using the high/low method of calculation.

Solution:

High Low Method

in £

Total Costs

Units

High Month =

May

7380

48

Low Month =

Feb

6510

30

Difference

870

18

Variable cost per unit =

Change in Cost

Change in cost driver

870

18

Variable cost per unit =

48.33333333

£

Fixed cost per month =

Total cost - Variable cost

At the high point:

=

7380

-

48

x

48

=

7380

-

2320

=

5060

£

At the low point:

=

6510

-

48

x

30

=

6510

-

1450

=

5060

£

 

Sunway Limited's fixed costs using the high/low method = £ 5060

High-low method of costing constructs a straight line between the two extreme activity levels that is highest and lowest activity of production and measures mixed cost ...