Central European University Cost Behavior Patterns and Concepts Paper Primary Task Response: Within the Discussion Board area, write 350450 words that res
Central European University Cost Behavior Patterns and Concepts Paper Primary Task Response: Within the Discussion Board area, write 350450 words that respond to the following questions with your thoughts, ideas, and comments. This will be the foundation for future discussions by your classmates. Be substantive and clear, and use examples to reinforce your ideas.Additional Information: Eddison Electric Company (EEC) provides electricity for several states in the United States. You have been employed as a cost accountant at this organization. As EEC’s corporate business cost accountant, you will need to have a clear understanding of the different types of costs (variable, fixed, mixed, direct materials, direct labor, and overhead) that the company carries.With your classmates, please discuss the following:Describe the differences between variable, fixed, and mixed costs, and list an example of each.Describe the differences between direct labor, direct material, manufacturing overhead, and non-manufacturing costs, and list an example of each.APA format and in-text citiation is a must Fixed, Variable, and Mixed Costs
There are many different methods to categorize costs. Perhaps the most
important method is categorizing costs as either fixed or variable.
Proper understanding of this classification enables the accountant to do the
following:
Determine product costs.
Predict future profitability of a firm.
Carryout breakeven and what-if analyses.
Fixed costs are defined as costs that, in total, do not change as business
volume changes. For example, for a dry cleaner, the monthly rent of lease
cost does not change whether the store is very busy or very slow. Therefore
it is a fixed cost.
Variable costs are defined as costs that in total, change directly with
volume. For example, at the same dry cleaner, the chemical costs, chemical
disposal costs, and clothes-hanger costs are all variable because the business
will incur more or less of these costs based directly on the amount of
business it does.
Mixed costs (also referred to as semifixed or semivariable costs) are a third
category. For example, at the dry cleaning business, a certain amount of
utilities will be incurred just for heating, air conditioning, and store lighting.
These will be categorized as fixed because the lights, heat, and air
conditioning are all needed regardless of the volume of dry cleaning that
occurs. A lot of utilities, however, will be needed to run the dry cleaning
equipment itself. This portion of the utility bill does vary based on the
quantity of clothes being cleaned. A half-full dry cleaning machine requires
less heat than a full one. Because part of the utility bill is fixed and part of it
varies based on business volume, utilities at this business are considered a
mixed (or semi-fixed or semi-variable) cost.
Unit of Measure
Before classifying a cost as fixed or variable, a designation is needed of how
that business’s volume will be measured. This measurement, referred to as
the firm’s unit of measure, should reflect what really drives most of its
variable costs. The accountant should not pick a unit of measure that does
not drive most of its variable costs. For example, square feet of steel
produced would not be a good unit of measure for a steel mill because it
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Fixed, Variable, and Mixed Costs
takes more raw material to make 5 square feet of 1-inch-thick steel than it
does to make 10 square feet of 1/4-inch-thick steel. The better unit of
measure for a steel mill would be tons of steel because this is what really
drives its major cost categoryraw materials.
For a hairdresser, the unit of measure might be number of haircuts given,
and for a passenger cruise liner it might be number of passengers.
Examples of units of measure for different kinds of business
Type of
Business
Alternative
Measures of
Business
Volume
Tons of steel
Miles of steel
$ of sales
Preferred
Method
Logic
Tons of
steel
Major cost components of
utilities and raw materials vary
as volume of steel produced
changes.
Consumer
product
firm
Total units
produced
Total sales $
Total sales
$
University
or College
Total
students
Total
revenue $
Total credit
hours
Total
credit
hours
Plumbing
repair
service
Total hours
provided
Total spare
part $ used
Combination
of both
Total hours
provided
Because firms like this make so
many different products, using
units as a measure would be
invalid; the common
denominator is sales $.
Different courses have different
credits to be earned; different
students take varying credit
loads and therefore pay
differing tuition (revenue $).
The measure that eliminates
these variations and still
reflects big variable drivers of
faculty costs is total credit
hours.
Other than spare parts
purchased and sold to
customers, the majority of
other variable costs are driven
by how many hours of labor
are expended on a job. Most
service firms like this
determine their billing by
Steel mill
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Fixed, Variable, and Mixed Costs
adding marked-up spare-part
costs to labor costs, including
an overhead rate based on
labor hours.
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