Classify the five costs listed in terms of their behavior: variable, step-variable, committed fixed, discretionary fixed, step-fixed, or semi variable. Show calculations to support your answers for mining labor/fringe benefits and royalties. Calculate the total cost for next February when 1,650 tons are expected to be extracted. Comment on the cost-effectiveness of hauling 1,500 tons with respect to Antioch’s trucking/haul-ing cost behavior. Can the company’s effectiveness be improved? How?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Antioch Extraction, which mines ore in Montana, uses a calendar year for both financial-reporting and tax purposes. The following selected costs were incurred in December, the low point of activity, when 1,500 tons of ore were extracted:
Straight-line
Charitable contributions* ...........................11,000. Trucking and hauling ..................275,000
Mining labor/
*Incurred only in December.
Peak activity of 2,600 tons occurred in June, resulting in mining labor/fringe benefit costs of $598,000, royalties of $201,000, and trucking and hauling outlays of $325,000. The trucking and hauling outlays exhibit the following behavior:
Less than 1,500 tons .................................................................................$250,000
From 1,500–1,899 tons ........................................................................................................................................275,000
From 1,900–2,299 tons ........................................................................................................................................300,000
From 2,300–2,699 tons ........................................................................................................................................325,000
Antioch uses the high-low method to analyze costs. Required:
- Classify the five costs listed in terms of their behavior: variable, step-variable, committed fixed, discretionary fixed, step-fixed, or semi variable. Show calculations to support your answers for mining labor/fringe benefits and royalties.
- Calculate the total cost for next February when 1,650 tons are expected to be extracted.
- Comment on the cost-effectiveness of hauling 1,500 tons with respect to Antioch’s trucking/haul-ing cost behavior. Can the company’s effectiveness be improved? How?
- Distinguish between committed and discretionary fixed costs. If Antioch were to experience severe economic difficulties, which of the two types of fixed costs should management try to cut? Why?
- Speculate as to why the company’s charitable contribution cost arises only in December.
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