Question

Problem 1: Cost behaviour: Committed and discretionary costs: high-low method Delta Mining Limited (DML), have mines ore in Australia's north-west, uses a calendar year for financial reporting purposes. The following selected costs were incurred in December, the low point of activity, when 1 400 tonnes of ore were extracted Straight-line depreciation Charitable contributions Mining labour (including on costs) Royalties Trucking and haulage incurred only in December S 30 000 12 000 315 000 140 000 240 000 Peak activity of 2 700 tonnes occur red in June, resulting in mining labour costs (including on costs) of S607 500, royalties of S224 500, and trucking and haulage costs of S360 000. The trucking and haulage costs exhibit the following behaviour: $240 000 280 000 320 000 360 000 Less than 1 500 tonnes From 1 500 1899 tonnes From 1 900-2 299 tonnes From 2 300-2 699 tonnes DML uses the high-low method for analysing cost behaviour Required 1. Assuming that royalties are a semi-variable cost, classify each of the other four costs listed above in terms of their behaviour as variable, step-variable, committed fixed, discretionary fixed, step- fixed or semi-variable. Show calculations to support your answers for mining labour costs 2. Calculate the total costs for next February when 1 650 tonnes of ore are expected to be extracted. 3. Comment on the cost effectiveness of hauling 1 500 tonnes with respect to DML's trucking haulage cost. Can the company's cost effectiveness be improved? How? 4. Distinguish between committed and discretionary fixed costs. If DML were to experience severe economic difficulties, which of the two types of fixed costs should management try to cut? Explain why.

Answer 1

Part1

Straight-line depreciation	Committed fixed
Charitable Contributions	Discretionary fixed
Mining labor/Fringe benefits	Variable
Trucking and Hauling	Step-fixed
Royalties	Semi-variable

Straight line depreciation remains fixed no matter the level of production and thus it is committed fixed costs

Charitable contribution is discretionary fixed costs as this cost is based on the decision of the user.

Calculations:

Mining labor/Fringe Benefits

=$315,000 / 1,400 tons = $225.00

$607,500 / 2,700 tons = $225.00

The cost is constant at the given volume levels that means it is a variable cost.

As for the production less than 1500 tonnes, the trucking and haulage cost is $240000 and thus for 1400 tonnes it is 240000 and it is step-fixed cost. As the cost: is decided for every range.

Royalties:

Variable Cost = ($224500 - $140,000) / (2700 tonnes– 1400 tonnes)=$65/ton

Fixed Cost = 224500-(2700*65) = 49000

Part 2

Depreciation	30000
Charitable contributions	-
Mining labor (1650*225)	371250
Royalties
Variable (1650*65)	107250
fixed	49000
Trucking and hauling	280000
Total costs	837500

Part 3

The hauling of 1,400 tons is not very cost-effective. It would be better if the company has decided to haul 1,399 tons in order to decrease their costs by $30,000.

Part 4

Committed fixed costs are the fixed costs that arise from an entity’s ownership or due to the use of facilities and organizational structure. Examples of committed fixed costs include depreciation, property taxes, etc.

Discretionary fixed costs are the fixed costs which are incurred according the decision of the user. Generally these costs are incurred for the some specific purpose. Examples of discretionary fixed costs include charitable contributions, research and development.

In case of an economic difficulty, it is advisable to reduce discretionary fixed costs as it is possible to change these costs in the short run.