Assume a firm’s original budget level was 400 units. Budgeted costs (in total and per unit) at two levels of activity are shown below. Activity level (cost driver)
400 units500 units
Total cost: Straight-line depreciation on factory equipment$2,000$2,000 Total cost: Clay for a firm making pottery products$10,000$12,500 Depreciation cost per unit$5$4
Clay cost per unit$25$25
For each of the two costs above, identify whether the cost is FIXED or VARIABLE, and explain why you chose the answer you chose. Draw two very rough “total cost” graphs depicting the costs. Assume (unrealistically) that the firm has only the two costs above. Answer the following questions, : (i)What is the total expected cost if the firm produced 800 units? (ii)What is the total expected cost if the firm produced 300 units? (iii)If all costs were as budgeted, what would be the total cost recorded in the accounts for the period if the firm produced 800 units? (iv)If all costs were as budgeted, what would be the total cost recorded in the accounts for the period if the firm produced 300 units? (v)Explain why the answers to (i) and (iii) are not the same. (Note that it is for the same reason that the answers to (ii) and (iv) are not the same.) (vi)Use two other terms to describe the phrase “costs recorded in the accounts”. (vii)Explain why the costing of the jobs and recording in the accounts uses the fixed rate of $5 and not $4 or some other amount for the fixed depreciation cost. QUESTION 2
A firm which manufactures cakes classifies the ingredient “sugar” as a direct material, and yet calls the ingredient “salt” overhead (an indirect material). Explain how it is possible for two materials that are similar in many ways to be treated differently by the firm. Similarities include: they are both tangible ingredients – we can see them being used in making the cake they both become an integral part of the cake
they both exist solely because of the existence of the cake (in...
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