Question

4- The following data have been collected for four different cost items. Cost at Cost at 140 units Cost Item 100 units 8,000 5,000 6,500 6,700 10,560 5,000 9,100 8,580 $ $ Which of the following classifications of these cost items by cost behavior is correct? The costs of direct materials are classified as: Cost Y mixed Cost W variable Cost X fixed Cost Z variable mixed A- mixed fixed variable B- variable variable mixed fixed fixed variable mixed C- mixed D-

Answer 1

Correct answer-------------(B)

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I have used high low method to determine whether a cost is purely fixed or mixed cost. Mixed cost is cost where some portion of cost is fixed and some is variable.

I have tested Cost item W and Y below.

Cost W
		Cost	No. of activities
A	High Level	$          10,560.00	140
B	Low Level	$             8,000.00	100
C=A-B	Difference	$             2,560.00	$                    40.00
A	Cost difference	$             2,560.00
B	No. of activities difference	40
C=A/B	Variable cost per unit	$                   64.00
		High Level	Low Level
A	No. of activities	140	100
B	Variable cost per unit	$              64.0000	$               64.0000
C=AxB	Total Variable cost	$             8,960.00	$              6,400.00
D	Total cost	$          10,560.00	$              8,000.00
E=D-C	Total fixed cost	$             1,600.00	$              1,600.00

W is mixed since there is fixed as well as variable portion in cost.

Cost Y
		Cost	No. of activities
A	High Level	$             9,100.00	140
B	Low Level	$             6,500.00	100
C=A-B	Difference	$             2,600.00	$                    40.00
A	Cost difference	$             2,600.00
B	No. of activities difference	40
C=A/B	Variable cost per unit	$                   65.00
		High Level	Low Level
A	No. of activities	140	100
B	Variable cost per unit	$              65.0000	$               65.0000
C=AxB	Total Variable cost	$             9,100.00	$              6,500.00
D	Total cost	$             9,100.00	$              6,500.00
E=D-C	Total fixed cost	$                          -	$                           -

Cost Y is purely Variable and there is no fixed portion of cost.

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Cost Z
		Cost	No. of activities
A	High Level	$             8,580.00	140
B	Low Level	$             6,700.00	100
C=A-B	Difference	$             1,880.00	$                    40.00
A	Cost difference	$             1,880.00
B	No. of activities difference	40
C=A/B	Variable cost per unit	$                   47.00
		High Level	Low Level
A	No. of activities	140	100
B	Variable cost per unit	$              47.0000	$               47.0000
C=AxB	Total Variable cost	$             6,580.00	$              4,700.00
D	Total cost	$             8,580.00	$              6,700.00
E=D-C	Total fixed cost	$             2,000.00	$              2,000.00