Question

Part 1

As EEC's corporate business financial analyst, you will need to have a clear understanding of the different types of costs (variable, fixed, and mixed) that the company carries. Complete the following for this assignment:

• Review EEC's journal activity.
• Define and identify its variable, fixed, and mixed costs.
• Determine what affect a sales volume increase or decrease will have on unit fixed cost, unit variable cost, total fixed cost, and total variable cost.

	Activity
1	Sales not on account	$29,440
2	Sales on account	28,060
3	Selling Expense	3,220
4	Administrative Expense	6,210
5	Supplies Factory	3,450
6	Insurance Factory	920
7	Indirect Labor	6,900
8	Factory Salaries	288
9	Factory Property Tax	173
10	Maintenance Expense Factory	2,001
11	Depreciation Expense Factory	3,726
12	Utilities Factory	828
13	Purchases of Raw Materials	17,250
14	Direct Labor Factory	3,450
15	Raw Material Inventory, January 1	2,070
16	Raw Material Inventory, December 31	1,380
17	Work in Process Inventory, January 1	4,140
18	Work in Process Inventory, December 31	2,300
19	Finished Goods Inventory, January 1	5,980
20	Finished Goods Inventory, December 31	4,830
21	Bad Debt Expense	276
22	Accounts Receivable, net	9,430
23	Prepaid Expenses	840
24	Land	2,760
25	Plant and Equipment	37,950
26	Cash 1/1/05	4,646
27	Accounts Payable	14,410
28	Interest Expense	28
29	Notes Payable, 10%	2,070
30	Bonds Payable 8%	8,510
31	Stockholders' Equity	31,510
32	Retained Earnings	6,670
33	Income tax rate	30%

As an EEC corporate business financial analyst, you must have an expert understanding of the various costing methods. Select 1 of the following costing concepts:Part 2

• Full costing or absorption costing
• Variable costing
• Target costing
• Life cycle costing
• Activity-based costing

Answer 1

1.

	Activity	Type of Cost	Explanation
1	Selling expense	Variable cost	It depends on the number of units sold
2	Administrative expense	Fixed cost	It does not changes with change in number of units
3	Supplies factory	Mixed cost	It includes both variable and fixed cost
4	Insurance factory	Fixed cost	It will be fixed for factory insurance
5	Indirect labour	Variable cost	It depends on number of employees
6	Factory salaries	Fixed cost	It does not depend on the number of units sold
7	Factory property tax	Fixed cost	It remains same but changes when there is change in property
8	Maintenance expense factory	Fixed cost	It remains same irrespective of sales
9	Depreciation expense factory	Fixed cost	It occurs irrespective of usage of asset
10	Direct labour factory	Variable cost	It depends on number of employees
11	Bad debt expense	Variable cost	It depends on debtors
12	Interest expense	Fixed cost	It does not depends on sales
13	Income tax	Mixed cost	If it varies with profit then it is variable cost,if it is paid on monthly rates then it is fixed cost
14	Utilities factory	Mixed cost	It includes both variable and fixed cost

2.Increase or decrease in sales volume will have different effect on different cost

• Unit fixed cost-it will decrease when sales increase and it will increase when sales decrease
• Unit variable cost-it will remain same irrespective of sales
• Total fixed cost-it will remain same irrespective of sales
• Total variable cost-it will increase with increase in sales and decrease with decrease in sales

3.Activity-based costing:Activity based costing is an accounting methodology that assigns costs to activities rather than products or services.It is a technique which involves identification of cost with each cost driving activity and making it as the basis for apportionment of costs over different cost objects or services