Question

Alva Community Hospital has five laboratory technicians who are responsible for doing a series of standard blood tests. Each technician is paid a salary of $30,000. The lab facility represents a recent addition to the hospital and cost $350,000. It is expected to last 20 years. Equipment used for the testing cost $10,000 and has a life expectancy of 5 years. In addition to the salaries, facility, and equipment, Alva expects to spend $200,000 for chemicals, forms, power, and other supplies. This $200,000 is enough for 200,000 blood tests.

Assuming that the driver (measure of output) for each type of cost is the number of blood tests run, classify each cost as a variable cost, discretionary fixed cost, or committed fixed cost.

Technician salaries
Laboratory facility
Laboratory equipment
Chemicals and other supplies

Answer 1

Solution :

Classification of Various costs:

Cost category	Variable cost	Discretionary fixed cost	Committed fixed cost
Technician salaries		Yes $ 1,50,000 ($ 30,000 * 5 technicians)
Laboratory facility			Yes ($ 3,50,000)
Laboratory equipment			Yes ($ 10,000)
Chemicals and other supplies	Yes ($ 2,00,000)

1. Discretionary fixed cost : Technician salaries ($ 1,50,000) of 5 lab technicians is treated as discretionary fixed costs because this cost can be altered or avoided relatively in short run period with the help of management attention.

2. Committed fixed cost : Laboratory facility ($ 3,50,000) and Laboratory equipment ($ 10,000) is to be treated as Committed fixed cost because they arise from the possession of various assets like plant, building , equipment etc. These costs cannot be controlled.

3. Variable cost : Chemicals and other supplies ($ 2,00,000) are to be treated as variable cost because it is an expense that changes in proportion to production output. Variable costs increase or decrease depending on the production volume.

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