Question

(1) Please list examples of fixed costs, variable costs, and mixed costs incurred by (your choice - choose one business) a McDonald’s restaurant, (2) a law firm, OR 3) a construction company. List at least one example of each type of cost. Also, please identify the activity base (driver) for each variable cost.

(2) DBR Manufacturing rewards the company’s plant manager with a year-end bonus based on the increase in the plant’s operating income. For purposes of determining the manager’s bonus, should operating income be calculated using variable costing or absorption costing? Support your recommendation.

Answer 1

1) Mc . Donald restaurant

Fixed cost:

· Rent

· Salary of Workers

· Manager salary

· Administration cost

· Annual taxes

· Maintenance cost

Variable cost:

· Cost of raw material- ingredients used

· Cost of packing material- for takeaway

· Delivery vehicle running cost

Mixed cost:

· Electricity cost

Activity drivers

· Cost of raw material – production

· Cost of packing material – number of orders

· Delivery vehicle – Kilometres

2) Operating Incomes should be calculated using Variable costing approach. Under Variable cost approach fixed manufacturing cost is treated as period cost and charged to the period in which it is incurred. Hence Manager’s cannot build up the inventory and how higher profit for incentives purpose. In Absorption costing the product includes Variable manufacturing cost and fixed manufacturing cost. Hence managers show higher operating Income by producing more than sales. So Variable Costing method is recommended