Question

X Company's accountant uses account analysis to estimate costs for each month, with direct labor hours as the independent variable. In July, she did the following cost behavior analysis for three specific cost items:

Cost Item	Total Cost	Variable Cost
Utilities	$364,632	$267,728
Rent	329,000	0
Supplies	371,084	371,084

In July, direct labor hours were 11,600. If direct labor hours in November are expected to be 12,500, what are expected total costs for these three cost items in November?

Answer 1

ANSWER :-

July :-

Cost item	Total Cost	Variable Cost	Fixed Cost Fixed cost = Total - Variable cost
Utilites	$ 3,64,632	$ 2,67,728	$ 96,904
Rent	$3,29,000	$ 0	$ 3,29,000
Supplies	$ 3,71,084	$ 3,71,084	$ 0
TOTAL COST	$ 10,64,716

Variable Cost per Labour hour :-

Utilites	$ 2,67,728 / 11,600	23.08 per hour
Supplies	$ 3,71,084 / 11,600	31.99 per hour

Now in November :-

Now direct labour hour expected in November to be 12,500

Utilites	$ 2,88,500	23.08 per hour * 12,500
Supplies	$ 3,99,875	31.99 per hour * 12,500

Noember Expected Total Cost :-

Cost item	Total Cost	Variable Cost	Fixed Cost Fixed cost = Total - Variable cost
Utilites	$ 3,85,404	$ 2,88,500	$ 96,904
Rent	$ 3,29,000	$ 0	$ 3,29,000
Supplies	$ 3,99,875	$ 3,99,875	$ 0
TOTAL COST	$ 11,14,279

• So when Increasing Direct labour so total cost Increased by $49,563 in November
• ( Utilites 20772 + 28791 Supplies = $49,563 )
  
• Variable Cost per Hour is Fixed.