Unit I – Assignment 1
Costs can be classified into two categories, fixed and variable costs. These costs behave differently based on the level of sales volumes. Suppose we are running a restaurant and have identified certain costs along with the number of annual units sold of 1000.
Item: Raw Materials (cost for hamburgers)
Total Annual Cost: 650
Item: Building Rent
Total Annual Cost: 9000
Identify which cost item above is fixed and variable and why? What is the cost per unit of each? Suppose we increased our sales volume to 6000 units and then to 8000 units the following year (and are still within the relevant range), what would be the total annual cost and unit cost of fixed and variable costs?
(1) Identify which cost item below is fixed and variable and why?
Raw materials: Expense for raw materials is considered as variable cost because the amount paid for raw materials increase with the amount of goods sold by the firm. The company pays $650 for 1,000 units of hamburgers. The expense for raw materials increases proportionally with the volume of hamburgers produced or sold. The amount paid for the raw materials increases to $3,900 for 6,000 units, and $5,200 for 8,000 units, or at a rate of $0.65 per unit.
Building rent: Building rest is considered a fixed cost because the total amount paid for the building rent does not change regardless of the volume of goods sold by the restaurant. Whether the firm sells 1,000 units, 6,000 units or 8,000 units, building rent remains at $9,000.
(2) What is the cost for 1,000 units?
The variable cost per unit is: $650/1,000 units = $0.65 per unit.
The total variable cost is: $650
The fixed cost per unit is: $9,000 /1,000 units = $9 per unit.
The total fixed cost is: $9 per unit * 1,000 units = $9,000
The total cost for 1,000 units is: $650 + $9,000 = $9,650
The total cost per unit is: $9 + $0.65 = $9.65 per unit
(3) What is the cost for 6,000 units?
The variable cost per unit is: $650/ 1,000 units = $0.65 per unit
The total variable cost is: $0.65 per unit * 6,000 units = $3,900
The fixed cost per unit is: $9,000 / 6,000 = $1.5 per unit
The total fixed cost is: $1.5 per unit * 6,000 units = $9,000
The total cost for 6,000 units is: $3,900 + $9,000 = $12,900
The total cost per unit is: $0.65 per unit + $1.5 per unit = $2.15 per unit.
(4) What is the cost for 8,000 units?
The variable cost per unit is:$650/ 1,000 units = $0.65 per unit
The total variable cost is: $0.65 * 8,000 units = $5,200
The fixed cost per unit is: $9,000 /8,000 units = $1.125per unit
The total fixed cost is: $9,000
The total cost for 8,000 units is: $5,200 + $9,000 = $14,200.
The total cost per unit is: $0.65 + $1.125 = $1.775 per unit.
Unit I – Assignment 2
Discuss the role of the financial accounting and managerial accounting functions in organizations and some of their job responsibilities. What are some of the differences between the two and the type of reports they may each use?
Managerial accountants measure, interpret and report financial information for management’s use, while financial accountants provide “useful” information to people outside the organization, primarily the lenders and investors. Both managerial and financial accounting makes use of financial statements, but the degree, timing, focus and the specificity of these reports may differ.
Managerial accountants provide reports to management, on a daily, weekly, or monthly basis. Financial reports given to investors, however, are on a quarterly basis. The Securities and Exchange Commission, for example, requires public companies to submit quarterly reports, which can be accessed by anybody at its Web site, http://www.sec.gov/. Managers need access to information more quickly and more frequently in order to address any problems that would affect the firm’s goals of increasing sales, value and profitability.
Financial reports accessed by managers may contain confidential information, including the terms reached by the firm with its suppliers, which if publicly disclosed, will give advantage to competitors. Managers also need more detailed information, including how the company’s product-lines geographic segments, new products and innovation are performing; how the company’s supply chain is doing; the status of each of the company’s facilities and plants, as to capacity, volume produced, inventory, and supply. Investors and creditors are more interested in how the company’s performing as a whole — its aggregate sales, margins, net profits, liquidity, and solvency. Investors and creditors are also given disclosures as to the risks the company is facing, and material developments that would affect business operations, and the company’s reasonable financial forecast, which information would be essential for these people’s decision making.
While the the type of information provided to managers and the public may differ to some extent, both information provided are required to be accurate and factual and thus should not be contradictory. Financial information provided by the financial accountants to people outside the firm are also subject to standards set by the Financial Accounting Standards Board and monitored by agencies, including the Securities and Exchange Commission. Accountants cannot provide information to managers that says the company is substantially burning cash in majority of its segments, but disclose to investors that the company is still earning money by window dressing or manipulating the company’s books. This is an accounting fraud, which is punishable by law.
As an example, General Motors Corp., the largest producer of auto-mobiles in the United States, submits financial reports to stakeholders on a quarterly basis, and explains those results in their conference calls. Management of GM also receive reports from its managerial accountants about how each of its product lines are performing, about the company’s sales in each of its geographic segments, and the effects of the company’s recent cost cutting measures. While the degree and timing of information provided to the managers and investors may differ, both were informed that GM incurred losses of $15.5 billion in the three months ended June 30, 2008, and the company’s outlook of lower vehicle sales for the rest of the year.