Question

Exercise 2.27 Sheridan Company recently opened for business. The owner wants a cost function estimate to help with future planning. The manager feels that last month's results fairly represent costs over the coming six months. Last month 400 pizzas were sold. From the following information, use account analysis to estimate the firm's cost function for pizzas sold. $1,548 Wages for part-time help Pizza toppings Pizza dough Store rent Depreciation on furniture and ovens Napkins, paper plates, cups, and straws Liability insurance Advertising Cleaning supplies Managers' salary Utilities (electricity and telephone) Soft drink purchases 1,520 114 256 Develop a cost function using the data from the accounting records. (Round variable cost per unit to 2 decimal places, e.g. 15.25.) Cost function = $ * Number of pizzas LINK TO TEXT LINK TO TEXT Use the cost function to estimate the total costs if 600 pizzas are expected to be sold next month. Total cost for 600 pizzas

Answer 1

Indirect costs(Non variable)

Store Rent: 421

Depreciation on furniture and ovens: 80

Liability Insurance: 99

Manager's salary: 1520

Total Fix cost=2120

Direct Costs( Variable Cost)

Wages for part time help: 1548

Advertising: 60

Cleaning supplies: 15

Pizza toppings: 120

Pizza dough:152

Napkins, paper plates,cups & straws: 60

Utilities: 114

Soft drinks: 256

Total Variable Cost= 2325 (400 Pizzas)

Cost function= $ 2120 + $ 5.81 x No. of pizzas

Cost for 600 pizzas= $ 2120 + ($5.81 x 600) = $5606

Explanatory Note: All the items of cost which vary i.e. increase/decrease with the volume of production are called and catgorised as Variable cost .eg : Consumables, wages While items which remain same with no impact of change in volume are called Fixed cost. eg manager's salary