Question
In: Accounting
Describe the principal costs incurred in the business that employs you today, or a prior business,...
Describe the principal costs incurred in the business that employs you today, or a prior business, and then categorize them as fixed, variable, or mixed costs. If the volume of activity increased 10%, what would happen, in general terms, to unit costs for that product or service? 100 words or more
Solutions
Expert Solution
Solution
Various principal cost in plastic coated notebook manufacturing business are Rent of premises, salary of employees, Rent of machine, electricity charges, selling distribution & administration expenses, Direct material, Direct wages etc.
Assuming 10,000 unit of Coated notebook are produced in a year.
| Cost | Type of Cost | Cost per unit | Total cost $ |
| Rent of premises | Fixed Cost | 3 $ | 30000 |
| Rent of Machine | Mixed Cost (1000 $ fixed per annum) | .60 $ | 6000 |
| Salary of employees | Fixed Cost | 6 $ | 60000 |
| Direct Material | Variable Cost | 3 $ | 30000 |
| Electricity Charges | Mixed Cost (500 $ Fixed Anuually) | .95 $ | 9500 |
| Direct wages | Variable Cost | 1.5 $ | 15000 |
| Selling & Office expense | Variable Cost | 1.5 $ | 15000 |
| Total | 16.55 |
Total cost per unit = 16.55 $ per unit
In case if we increase the volume of activity by 10 % i.e. total production annually will be 10000+1000 = 11000 Units
| Variable cost / unit | 6 $ |
| Fixed Cost / unit | 8.18 $ |
| Mixed Cost / Unit | 1.54 $ |
Total Cost per unit = 15.72 $
Learning
1. Variable cost per unit does not changes with the change in level of activity in this case variable remain same at 6 $ per unit.
2. Fixed Cost per unit reduces as we increase the level of output/ activity in this case fixed cost has reduced from 9 $ to 8.18 $.
3. Mixed cost has both the component fixed as well as variable.
Therefore in general terms the cost of the product reduces when the level of output is increased.
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