Fixed and Variable Costs Essay

The restaurant Nita’s looked at the costs for the year. The restaurant wanted to see what some of their fixed and variable costs were for the year. They also wanted to make sure they remain in their relevant range. The costs focused on were the cost of hamburgers (raw materials) and the cost of building rent. It was determined that the raw materials were the variable costs because the cost will vary based on production of hamburgers. A variable cost is a cost that will change in direct proportion to changes in the cost-driver level (Horngren, Sundem, Stratton, Burgstahler & Schatzberg, 2008, pg.

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8). It was determined that the building rent was the fixed cost because the cost of rent will stay the same every month regardless of production. A fixed cost is a cost to a company that will not be affected by changes in the cost-driver level. It is a cost that is not going to change (Horngren, Sundem, Stratton, Burgstahler & Schatzberg, 2008, pg. 48). The costs per unit were then calculated. It was found that the raw materials cost were $650 for the year and a 1000 units were sold. That means the cost per unit was . 65 ($650/1000). It was found that the building rent cost was $9000 for the year.

That means the cost per unit was $9 ($9000/1000). The restaurant then wanted to see what would happen if the sales increased over the next couple of years. They first increased the number of units sold to 6000. It was found that the raw materials cost per unit would remain the same but the total cost would increase to $3900 (. 65 x 6000). It was then found that the building rent cost per unit would decrease to $1. 50 (9000/6000). Then they increased the number of units sold to 8000. It was found that the raw Unit 1 Individual Project 3 aterials total cost would increase to $5200 (. 65 x 8000). It was then found that the building rent cost per unit would decrease to $1. 125 (9000/8000). The last thing the restaurant wanted to know is if they would remain in the relevant range. Relevant range is the limit that a cost-driver level that shows a specific relationship between the costs and the cost driver that makes it valid (Horngren, Sundem, Stratton, Burgstahler & Schatzberg, 2008, pg. 52). As long as the restaurant can support making the increased volume of hamburgers, they will remain in the relevant range.

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