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Identify a cost: Variable, Fixed, Mixed, and Step Costs

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Describe a variable, fixed, mixed and step cost in an organization. Would this organization be more likely to benefit from using a manufacturing cost hierarchy or a customer cost hierarchy for determining cost drivers? Why? Identify a cost in each of the four cost hierarchies.

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National Linen launders commercial tablecloths, bedding, garments and rags for restaurants, medical facilities, hotels and auto repair shops. Costs that fit each of the categories include:

Variable: laundry soap, water, folding labor
Fixed: plant rent, IT cost
Mixed: utilities at the plant, fleet maintenance
Step: supervision labor; number of delivery trips

The firm is more likely to benefit from ...

Solution Summary

Your discussion is 257 words and describes a commercial laundry firm, explaining why customer cost would be a better hierarchy for them.

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Some cost management systems

Farragut, Inc., uses activity-based costing to account for its chrome bumper
manufacturing process. Company managers have identified four manufacturing activities:
materials handling, machine setup, insertion of parts, and finishing. The budgeted
activity costs for 2010 and their allocation bases are as follows:
Activity Total Budget Cost Allocation Base
Materials Handling $ 6,000 Number of Parts
Machine Setup 3,300 Number of Setups
Insertion of Parts 54,000 Number of Parts
Finishing 80,000 Finishing direct labor hours
Total $143,300
Farragut expects to produce 1,000 chrome bumpers during the year. The bumpers
are expected to use 3,000 parts, require 20 setups, and consume 2,000 hours of
finishing time.
1. Compute the cost allocation rate for each activity.
2. Compute the indirect manufacturing cost of each bumper.

Types of Cost Behavior
Identify the following planned costs as (a) purely variable costs, (b) discretionary fixed costs, (c) committed fixed costs, (d) mixed costs, or (e) step costs. For purely variable costs and mixed costs, indicate the most likely cost driver.
1. Total repairs and maintenance of a university classroom building.
2. Sales commissions based on revenue dollars. Payments to be made to advertising salespersons employed by radio station WCCO, Minneapolis.
3. Jet fuel costs of Southwest Airlines.
4. Total costs of renting trucks by the city of Nashville. Charge is a lump sum of $300 per month plus $.20 per mile.
5. Straight-line depreciation on desks in the office of an attorney.
6. Advertising costs, a lump sum, planned by ABC, Inc.
7. Rental payment by the Internal Revenue Service on a five-year lease for office space in a private office building.
8. Advertising allowance granted to wholesalers by 7-up Bottling on a per-case basis.
9 Compensation of lawyers employed internally by Microsoft.
10. Crew supervisor in Lands' End Inc mail-order house. A new supervisor is added for every 12 workers employed.
11. Public relations employee compensation to be paid by Intel.

Beverly High Fashions Company manufactured and sold 1,000 pair of leather handbags during July. Selected data for this month follow:
Sales $110,000
Direct materials used 31,000
Direct labor 16,000
Variable manufacturing overhead 13,000
Fixed manufacturing overhead 11,000
Variable selling and administrative expenses ?
Fixed selling and administrative expenses ?
Contribution margin 40,000
Operating income 22,000
There were no beginning or ending inventories.

1. What were the variable selling and administrative expenses for July?

2. What were the fixed selling and administrative expenses for July?

3. What was the cost of goods sold during July?

4. Without prejudice to your earlier answers, assume that the fixed selling and administrative expenses for July amounted to $4,000.
a. What was the break-even point in units for July?
b. How many units must be sold to earn a target operating income of $14,000?
c. What would the selling price per unit have to be if the company wanted to earn an operating income of $22,500 on the sale of 900 units?

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