Question

1. Many costs can be easily classified as variable or fixed. Mixed costs are generally analyzed (via High/Low method, Least squares method, scattergraph) to determine the fixed and variable components. You are assisting management in the preparation of operational goals for next year. You note that mixed costs were less than 3% of total costs. Would you recommend that mixed cost be analyzed to determine the fixed and variable components? Not analyze the mixed costs? If not, what?

4. What is the difference between the cost per unit of inventory under absorption (full) costing and variable costing? Assume that a company has zero units of beginning finished goods inventory, produces 10,000 units during the current period, and sells 8000 units during the period.

Answer 1

Q-1. Yes, I recommend that mixed cost must be analyzed to determine the fixed and variable components despite of less than 3% of total costs because it is very important to maintain cost control in the organization, and it is possible only when, proper analysis is made for each component of cost including fixed and variable cost component separately.

Q-4. As we know that the cost per unit under absorption costing is more than variable costing because inventories under absorption costing absorb fixed factory overhead, whereas, inventories under variable costing include only variable production costs.

According to a given case, If inventories increase or exist (closing inventory 10,000-8,000=2,000 units) during the year, production exceeded sales (produces 10,000 units during the current period and sells 8000 units during the period) and income is less under variable costing than under absorption costing because-

1. inventories under absorption costing absorb fixed factory overhead, whereas, inventories under variable costing include only variable production costs.

2. As a result value of inventory under absorption costing is more than variable costing.

3. After its adjustment, cost of goods available for sales under absorption costing is less than variable costing,

So income is more under absorption costing against variable costing.

Thanks & all the best............