Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 9

The following costs are labeled fixed or variable according to a typical designation in accounting. Under which circumstances would any of these costs behave in a manner opposite to that listed?

a. Direct labor—variable.

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b. Equipment depreciation—fixed.

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c. Utilities (with a minimum charge)—variable.

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d. Supervisory salaries—fixed.

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e. Indirect materials purchased in given sizes that become spoiled within a few days— variable.

Step 1 of 6

Cost estimation

Cost estimation is an important exercise because it helps managers in decision making. Correct cost estimates result in cost saving and making business successful. Cost estimates helps managers to evaluate and choose the best alternative. It is important for managers to capture the correct cost for each alternative.

There different methods used for cost estimation like engineering, accounting and statistical analysis.

Fixed and variable cost

Fixed cost does not change with change in the activity level and remains fixed. For example, building rent shall be fixed cost which does not change with change in activity level.

Variable cost changes with change in activity level and it increases proportionately. Variable cost per unit remains same and it increases with the increase number of units produced.