Question

(1) Please define TWO of the following terms.

• Activity Base (Driver)
• Fixed Costs
• High-Low Method
• Mixed Costs
• Relevant Range
• Variable Costs

(2) Consider McDonald’s for a moment and list an example of each of the following costs that would be incurred by a McDonald’s restaurant: (a) a fixed cost, (b) variable cost, and (c) mixed cost. Please be specific and explain why each is a good fit in that category.

(Note: For the variable cost on your list, please identify the activity base (driver))

Answer 1

(1) High-low method:  It is a method for finding or separating the Variable cost and fixed cost from the total cost. It is a method which compares two extreme activities. They are highest activitycost level and lowest activity cost level. Which in turns gives the prr unit variable cost.

Formula: (highest activity cost - lowest activity cost)÷(highest activity level - lowest activity level)= VC per unit.

Mixed costs: Mixed cost is also known as semi variable or semi fixed cost where part of the mixed cost is fixed and the rest is variable in accordance with unit, hours etc. That is the the fixed part do not vary with the change in activity level but variable part changes with the activity level.

(2) Considering McDonald's

=>Fixed cost: Salaries of employees and manager. Salaries of employees and manager of McDonald's are fixed for every month and do not change with the change in the activity level or units sold. Their monthly salaries are fixed according to their positions and change in the volume of activities do not affect this cost.

=>Variable cost: Food packaging cost. Packaging of food totally depend upon the units of food sold to the ultimate consumer. For packing burger, French fries etc. in McDonald's, the food is the factor which is to be sold. Since the food sold itself is an variable factor ultimately the food packaging cost becomes variable. For future periods packaging materials are produced in accordance with the anticipated demand which is ultimately variable.

Activity driver is food units sold: eg: if 100 burgers are sold in a day then, no.of printed baking paper used to wrap burgers will also be 100(excluding the wastes occurred during packaging).

=> Mixed cost: Electricity Charges. Electricity charges are mixed cost since certain portion of which is a tariff fixed and the rest depend upon the units of electricity consumed. In McDonald's electricity is also consumed for cooking. Therefore, the charges include specific amount which is minimum and also fixed and the rest is variable and depend on the volume of consumption which makes the charges vary with varying activity level but not proportionately since a part is fixed.

Thank you.