Brief Exercises On Monthly Production Costs In Dilts Company

Brief Exercisesbe5 1monthly Production Costs In Dilts Company For Two

Brief Exercises BE5-1: Monthly production costs in Dilts Company for two levels of production are as follows: Costs for 2,000 units and 4,000 units. Indicate which costs are variable, fixed, and mixed, and give the reason for each answer.

BE5-2: For Lodes Company, the relevant range of production is 40-80% of capacity. At 40% of capacity, a cost is $4,000 (variable) and a cost is $6,000 (fixed). Diagram the behavior of each cost within the relevant range assuming the behavior is linear.

BE5-4: Bruno Company has data on a mixed cost, using miles driven as the activity level, with costs recorded for different months. Compute the variable and fixed cost elements using the high-low method.

Paper For Above instruction

Understanding the nature of costs—variable, fixed, or mixed—is foundational to managerial accounting and cost management. Analyzing costs at different activity levels helps organizations predict expenses, plan budgets, and make strategic decisions. This paper discusses the classification of costs in the context of Dilts Company, Lodes Company, and Bruno Company, applying relevant costing techniques like the high-low method to understand cost behaviors and their implications for managerial decision-making.

Analysis of Costs in Dilts Company

In the case of Dilts Company, the costs are analyzed at two production levels—2,000 and 4,000 units. Indirect labor costs are $10,000 at 2,000 units and $20,000 at 4,000 units. Supervisory salaries are explicitly mentioned as $5,000, and maintenance costs are $4,000 at 2,000 units. To classify these costs, we consider how they behave across production levels.

Indirect labor increases proportionally with production volume, doubling as production doubles from 2,000 to 4,000 units, indicating a variable cost behavior. Supervisory salaries remain constant regardless of production volume, indicating a fixed cost. Maintenance costs increase as production increases but may not be perfectly proportional; however, given the data, maintenance appears to scale with activity, suggesting it is variable in nature.

Cost Classification:

• Indirect Labor: Variable — because costs increase proportionally with the number of units produced.
• Supervisory Salaries: Fixed — because costs remain unchanged despite changes in production volume.
• Maintenance: Likely Variable — as it appears to vary with output, although further data could solidify this classification.

Analysis of Cost Behavior in Lodes Company

For Lodes Company, at 40% of capacity, the relevant costs are $4,000 (variable) and $6,000 (fixed). Assuming linear behavior within the relevant range, the total cost can be modeled as a combination of fixed and variable components.

The variable cost remains constant per percentage point of capacity, and the fixed cost remains unchanged across this production range. Plotting these costs across the relevant range would yield a straight line for variable costs sloping upwards, while fixed costs would be a horizontal line at $6,000.

Graphical Representation:

In summary, variable costs increase linearly with capacity utilization, starting from zero at zero growth, while fixed costs remain constant. These assumptions allow for straightforward budgeting and forecasting within the relevant operational range.

Analysis of Bruno Company's Mixed Cost

Bruno Company’s data on miles driven and corresponding total costs from January to April are used to determine the variable and fixed components using the high-low method. The highest activity occurs in March (8,500 miles, $15,000 total), and the lowest in February (7,500 miles, $14,000 total).

Using High-Low Method:

Calculate the variable cost per mile:

• Change in total cost: $15,000 - $14,000 = $1,000
• Change in miles driven: 8,500 - 7,500 = 1,000 miles
• Variable cost per mile: $1,000 / 1,000 miles = $1 per mile

Next, calculate the fixed cost component:

• Total cost at high activity (March): $15,000
• Less: (Variable cost per mile miles driven at high activity): $1 8,500 = $8,500
• Fixed cost: $15,000 - $8,500 = $6,500

Therefore, the mixed cost function can be expressed as:

Total Cost = Fixed Cost + Variable Cost per Mile * Miles Driven

= $6,500 + $1 * Miles Driven

Implications:

This analysis helps Bruno Company budget for future costs, manage capacity, and assess profitability at different activity levels. By understanding both fixed and variable components, managerial decisions regarding pricing, expansion, or cost control can be better informed.

Conclusion

Classifying costs accurately is crucial for effective managerial decision-making. Variable costs change proportionally with activity levels, fixed costs remain constant, and mixed costs contain elements of both. Techniques like the high-low method provide a straightforward approach to dissecting mixed costs, enabling managers to predict expenses accurately across varying production volumes. For companies like Dilts, Lodes, and Bruno, understanding these cost behaviors is fundamental to budgeting, planning, and strategic decisions that drive operational efficiency and financial performance.

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