# The Fixed Costs Per Unit And The Variable Calculation Accounting Essay

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The formula for calculating the above is the following high low for the manufacturing cost of the soccer company

The Soccer Ball: High low (manufacturing costs) and based on the table provided above the results are

= RM 3.25 per cost variable

Total Fixed Cost = Total Cost ' Total Variable Cost

= RM 36,430 ' 3.25 ' 7,000)

= RM 36,430 ' 22,750 = RM 13,680

Total Fixed Cost = Total Cost ' Total Variable Cost

= RM 36,430 ' (3.25 ' 7,000)

=RM 13,680

The Marketing Costs for The soccer company

The Soccer Ball: High low (Marketing costs) and based on the table provided above the results are

(RM 65,600' RM 48,000)/(7000 ' 4800)

= RM 8.00

Total Fixed Cost = Total Cost ' Total Variable Cost

' RM 65,600 ' (RM 8 ' 7000)

' = RM 9,600

The results

1. Based on the above results the total variable cost for per unit of soccer ball would be (RM 3.25 + RM 8.00) which is RM 11.25.

2. Based on the above results the total Fixed cost for per unit of soccer ball would be

(RM 13,680+ RM 9,600) which is RM 23,280

A1b) the tennis ball fixed and variable costs per unit

The Tennis Ball: High low (manufacturing costs) and based on the table provided above the results are

(RM 8820' RM 8,160)/(9800 ' 6800)

= RM .22/ unit

Total Fixed Cost = Total Cost ' Total Variable Cost

' RM 65,600 ' (RM .22 ' 9,800)

' = RM 7,664

The Tennis Ball: High low (Marketing costs) and based on the table provided above the results are

(RM27,000' RM 21,000)/(9800 ' 6800)

= RM 2/ unit

Total Fixed Cost = Total Cost ' Total Variable Cost

' RM 27,000 ' (RM 2 ' 9,800)

' = RM 7,400

1. Based on the above results the total variable cost for per unit of Tennis ball would be (RM .22 + RM 2.00) which is RM 2.22

2. Based on the above results the total Fixed cost for per unit of Tennis ball would be

(RM 7,664+ RM 7,400) which is RM 15,064

The disadvantages of using a high ' low method are as follows.

1. The high low end method is very time consuming one , it requires a lot of time to key in the data.

2. The method cannot be applied in places where there is a large amount of data to be used

3. The usage of two extreme data points is an other draw back in the method.

4. The results mostly rely on the judgment of the person performing the analysis.

The cost volume analysis for both the companies can be calculated using the below formula

The break even /unit can be calculated by (Total Fixed Costs )/ (Price ' VC per unit)

For the Soccer ball

=(RM23,280 )/ (RM 20' RM11.25) = RM 2660-/-

For the Tennis ball

=(RM 15064)/ (RM 3' 2.22) = RM 19,313-/-

Product Price Unit VC Unit CM The Package Package CM

Soccer Ball

Tennis Ball

RM 20

RM 3 11.25

2.22 8.75

0.78 128

181 1,120

141.18

Total 1,261.2

Break Even Point for Package =(RM 23,280 + RM 15,064+RM 130,000)/1261.2

= 133.47

Breakeven point for soccer ball = 133.47 X 128 = 17084(Rounded)

Breakeven point for Tennis ball = 133.47 X 181 = 24158.(Rounded)

Income statement

Soccer ball Tennis ball Total

The sale (20 '17,084) 341,680 (3 ' 24,158) 72,474 414,154

V.C (11.25' 17,084) 192,195 (2.22 ' 24,158) 53630 245,825

C.M 149,485 18844 168,329

F.C 168,344

safety margin for soccer balls per unit = 10,000 ' 2,660 = 7340 units

Safety margin for soccer balls = 20 ' 7340 = 146,800

safety Margin for tennis balls per unit =30,000 ' 19,312 = 10688 units

safety margin for tennis balls = 3 ' 10688 = 32,064

Total margin of unit = 18,028

So the Total margin = 178,864

F.C for soccer balls = (RM 13,680 ' 10%) + RM 13,680 + RM 9,600 = RM 24,648

V.C for soccer balls = (RM 3.25 ' 10%) + RM 3.25 + RM8 = RM 11.58

Product Price Unit V.C Unit C.M Package Package CM

Soccer Balls 20 11.58 8.42 128 1077.8

Tennis Balls 3 2.22 0.78 181 141.2

Total Package 1219

The Breakeven point = (RM 500,000+RM24,648+15,064)/1219 = 443

Breakeven point for Soccer Balls = 443 ' 128 = 56704

Breakeven point for Tennis Balls = 443 ' 181 = 80183

By enabling to calculate the cost of the resources sacrificed or forgone in production of a commodity, accountants can achieve a specific objective to aid with decision-making. For example, costs can determine the selling price of a product. If the cost of making that specific product is considerably high, then it is natural for the management to raise the price of that product in order to make a satisfied profit. If a business requires the purchase of a new machinery to increase it's output but the short-term funds are used for these purchases, this may cause working capital problems. In effect, the costs of purchasing new machinery determine the budgeting control of a firm. Economists often assess the cost of something in terms of the foregone alternative, the opportunity cost. For example, the cost of purchasing new machinery with short-term funds will result in the firm being able to increase its output, however it will reduce its liquidity position.

Effectively, costs not only determine the revenue and profit of the business, it provides information for managers in management accounting with aid to decision-making (Marcouse, 2003). In separating each cost according to how it behaves, the ability to predict how costs will change or react to the changes in the level of business activity or volume can be examined. The classification of costs will be explained as follows:

' Variable costs

' Fixed costs

' Semi-fixed costs

' Semi-variable costs

Variable costs

Variable costs 'are those that move directly proportional to activity (one unit results in RM 1 of variable cost, two units result in RM 2 of variable cost')' (Dyson, 2001, p.375). They represent payments made for the use of inputs such as labour, fuel and raw materials and if our manufacturer doubled output then these costs would rise significantly and proportionately. There would be extra costs for the additional raw materials and fuel which would be required. Also, more labour would most likely be required, incurring extra costs in the form of wages.

Fixed costs

Fixed costs are 'costs which do not vary with changing levels of activity, for example, factory rent, insurance and rates'' (Glautier and Underdown, 2001, p.402) this means that, when the sale output rises, fixed costs remain the same. However, the cost per unit of a product reduces as sale output rises. This is because the cost can be more spread over. An example is our new Surrey Quays Factory rent imposed this year ' no matter how much an activity level increases, the cost of the rent will remain the same regardless. But, suppose the rent was RM 250 per week fixed and sale output within that week increased from 200 units to 500 units; its original cost per unit was RM 1.25 but with its increase output of 500 units, cost per unit falls to RM 0.50.

Fixed costs, by definition, 'stay unchanged over stated ranges in the volume of production' (Wood and Sangster, 2005, p55) but if production increases above a certain figure, then what may be considered as a fixed cost of renting the factory could change. The business might need to rent additional premises to match demand as it increases. It is therefore required for the 'stated ranges' to be reasonably concise, so that what are considered fixed costs, are 'costs which are fixed in the short term'. (Wood and Sangster, 2005) The reason for this is because 'a change would not normally happen in the short term'. From the example above, if the need of additional premises were required due to the increase in sales output, it would still take a while to rent and set up these new premises before production can start.

Semi-fixed costs

Semi-fixed costs are costs composed of a mixture of fixed and variable components essentially it is a fixed cost that increases in steps. In the earlier example of the rent as a fixed cost, it can be understood that this behaviour can be classified as a semi-fixed cost, since the increase of output outside the range would result in the increase in rent of additional space.

Semi-variable costs

A semi-variable cost is 'a cost containing both fixed and variable components and which is thus partly affected by a change in the level of activity, but not in direct proportion.' (Davies, 2002, p.284) Examples of such costs include telephone bill, Internet usage and electricity bills.