Assignment



Assignment

How should mixed costs be classified in Cost-volume-profit (CVP) analysis?

Mixed cost is also known as semi variable cost and possesses characteristics of both fixed and variable because it is made up of both fixed and variable cost. The mixed cost can be explained by assessing the telephone bills expense as telephone bill is comprised of both fixed cost i.e. the line rent which remains fixed throughout the consumption of telephone and variable cost i.e. the bill or expense associated to making number of calls to another telephone or mobile network. The variable cost is charged as per the minute, one talk on phone. The mixed cost can also be comprehended by another example of depreciation cost associated to the truck which represents the fixed component of cost and fuel related expense which represents he variable component of cost because it vary as per number of miles traveled.

It is worth mentioning that the mixed cost is not considered as useful figure in original form that is why it is recommended to break it into fixed and variable parts of cost with the help of cost behavior analysis methods. Cost behavior is defined as the alteration or change in cost as per the level of production varies. Therefore mixed cost should be broken into fixed and variable components of cost to carry forward the Cost-volume-profit analysis. This issue is resolved by utilizing the High Low Methodology. The fixed cost is referred to the cost that does not change with the level of production or any activity. This cost will remain same and keep on incurring even in case of no production activity. The examples of fixed cost can be rent expense, depreciation, insurance etc. However, the fixed cost may decrease in case of increase in production activity. Variable cost is referred to the altering cost related to the changed level of production. This cost will keep on increasing with the number of increased units of production. The example of variable cost includes wages, utility etc. (Jan, I., 2011)

What approach is used to effect the appropriate classification?

The most suitable approach for adequate classification of fixed and variable cost is High/Low Method, which is commonly utilized to break the semi variable cost into fixed and variable costs. This technique assists in projecting the accurate results. In this method cost is considered at both high and low point in time. In order to find out variable cost, the usual practice of company should be considering and going through all past costs of direct material and utilize the highest and lowest amount paid for it to reach to variable cost. Later the lowest cost is subtracted from the highest cost and gives the resultant cost. The resultant answer is divided by the difference obtained from subtracting the lower cost to the higher cost.

In order to identify the fixed cost, the variable cost is multiplied to both the highest and lowest change calculated as cost. Then this amount is subtracted from the respective highest ...