Management Accounting: Fixed and Variable Costs

Essay by grandmadiUniversity, Bachelor'sA+, May 2007

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I.Assignment InstructionsCosts can be classified into two categories, fixed and variable costs. These costs behave differently based on the level of sales volumes. Suppose we are running a restaurant and have identified certain costs along with the number of annual units sold of 1000.

Item: Raw Materials (cost for hamburgers)Total Annual Cost: 650Item: Building RentTotal Annual Cost: 9000Identify which cost item above is fixed and variable and why? What is the cost per unit of each? Suppose we increased our sales volume to 6000 units and then to 8000 units the following year (and are still within the relevant range), what would be the total annual cost and unit cost of fixed and variable costs? (American InterContinental University, 2007)II.Assignment Detail1. Identify which cost item below is fixed and variable and why?a. Raw materials: Raw materials are a variable cost. The costs of raw materials are dependent on the "per unit of activity" and will change with the activity level.

(Horngren/Sundem/Stratton, 2005. p.46) or units that cause costs. (Horngren/Sundem/Stratton, 2005).

b.Building rent: Building rent is a fixed cost. It is a constant no matter what the level of activity and does not change. A fixed cost would only change if a company were to rent a different facility that either increased or decreased the amount of the fixed cost. (Horngren/Sundem/Stratton, 2005).

2. What is the cost per unit of each?a. The cost per unit of the material is: $0.651. $650 / 1000 = $0.65b. The cost per unit for rent is: $9.001.$9000 / 1000 = $9.003. What would be the total annual cost and unit cost of fixed and variable costs at 6000 units of sales?a.6000 Units1. Variable cost per unit is = $0.652. Total annual cost of variable cost = $0.65 * 6000 = $3,9003. Unit fixed...