Question

 

Analyze the following costs and measures of activity in Snowtown, USA that are listed below in this table. Each one of the costs must be classified as a variable cost or as a fixed cost for this particular analysis of cost behavior. There is only to be one answer in the Cost Behavior column -- either variable or fixed.  

VERY IMPORTANT: There is only one final correct answer to each item in this list , so make sure you only type the word “variable” in the column, when that is your final answer to an item, or only type the word “fixed” in the column for an item if that is your final answer.

Item	Cost Description	Measure of Activity	Cost Behavior (Enter: Variable or Fixed)
1.	Cost of vaccine used at a clinic	Vaccines administered
2.	Building rent at a taco shop	Dollar sales
3.	Salary of production manager at a snowboard manufacturer	Snowboards produced
4.	Cost of electricity for production equipment at a snowboard manufacturer	Snowboards produced
5.	Ferry captain's salary on a regularly scheduled passenger ferry	Number of passengers
6.	Cost of glue used in furniture production	Units produced
7.	Janitorial wages at a snowboard manufacturer	Snowboards produced
8.	Depreciation on factory building at a snowboard manufacturer	Snowboards produced
9.	Cost of advertising at a snowboard company	Snowboards sold
10.	Cost of shipping bags of fertilizer to a customer at a chemical plant	Bags shipped

Question 3: a) Provide a definition for variable costs, and then explain how managers use variable costs to enable more effective decision making. Enter your final answer to this particular item in the space below this sentence.

Question 3: b) Provide a definition for fixed costs, and then explain how managers use fixed costs to inform decision making processes. Enter your final answer to this particular item in the space below this sentence.

Question 3: c) Analyze the information in this table and determine the correct cost behavior classification for each one of the separate items included in this list. Enter your final answer in the third column of the table for each separate item to indicate whether the cost is mainly a fixed cost or a variable cost with respect to the measure of activity listed next to it. This means the cost behavior category is either a variable cost or a fixed cost, and not both.

Answer 1

3a. Variable costs are those costs which varies with the change in production of goods in a company. It can be increased or decreased by increasing or decreasing the number of units producd or sold.

Variable costs are useful in decision making since managers can decide whether to continue using any cost activity by determining whether such activity could be performed in house of outsourced from any other organisation for cost reduction purpose.

3b. Fixed costs are those costs that will be incurred irrespective of the amount of goods produced. Like- depreciation, salary, etc which shall be incurred irrespective of goods produced.

3c.

Item	Cost Description	Measure of activity	Cost behaviour ( Variable or Fixed)
1	Cost of vaccine used at a clinic	Vaccines administered	Variable cost (since it is vaccine is dependent upon the number of patients)
2	Building rent at a taco shop	Dollar sales	Fixed cost
3	Salary of production manager at a snowboard manufacturer	Snowboards produced	Fixed cost ( since salary is regular in nature)
4	Cost of electricity for production equipment at a snowboard manufacturer	Snowboards produced	Variable cost
5	Ferry captain's salary on a regularly scheduled passenger ferry	Number of passengers	Variable cost (since it is depnedent upon the number of passengers travelled)
6	Cost of glue used in furniture production	Units produced	Variable cost
7	Janitorial wages at a snowboard manufacturer	Snowboards produced	Fixed Cost
8	Depreciation on factory building at a snowboard manufacturer	Snowboards produced	Fixed Cost
9	Cost of advertising at a snowboard company	Snowboards sold	Fixed Cost
10	Cost of shipping bags of fertilizer to a customer at a chemical plant	Bags shipped	Variable cost