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Mixed Costs in a Service Business vs. a Manufacturing Business

As the management accountant preparing the budget for the upcoming year, you know how important it is to properly classify costs as being fixed, variable, or mixed. As you are expecting to be promoted to headquarters soon, you want to leave a procedure manual for your junior accountants to have handy for future reference.

While the junior accountants all have a good understanding of assessing variable and fixed costs, they have no idea of how, in the past, you have handled mixed costs: those with a fixed component and a variable component.

You plan to write a how-to manual describing what mixed costs are and an example of how to determine how much of it is fixed vs. variable.

In your manual, include the following:

Define mixed cost.
Give an example of a mixed cost in a
- service business.
- manufacturing business.
What is wrong with just treating the mixed cost as being all variable or all fixed?
Using the high-low method, determine how much of the following mixed cost is variable versus how much is fixed.

Historical Data for Factory Utility Costs:
(including a month in which the plant was shut down for vacation)

Monthly Units Produced Total Utility Costs
1,000 $15,000
1,100 $16,000
0 $5,000
800 $13,000

* Define mixed cost.
* Give an example of a mixed cost in a
- service business.
- manufacturing business.
* What is wrong with just treating the mixed cost as being all variable or all fixed?
* Using the high-low method, determine how much of the following mixed cost is variable versus how much is fixed.

Historical Data for Factory Utility Costs: (including a month in which the plant was shut down for vacation).

Solution Preview

* Define mixed cost.

Mixed Cost: The cost which is fixed up to a certain level and then varies according to the production is considered to be a mixed cost. A mixed cost has a portion that is fixed and a portion that is activity related.

Mixed costs consist of fixed and variable component of costs, .i.e. mixed costs contain both fixed costs and variable costs. Mixed costs need to be bifurcated in to fixed costs and variable costs for the purpose of analysis of costs for decision making.

* Give an example of a mixed cost in a

- Service business. Example: telephone ...

Solution Summary

This solution is composed of a 400 word response which outlines how to create a manual discussing mixed costs and how this concept can be applied to other businesses.

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