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Concept explainers
21-1DQ
Introduction:
Variable cost: Variable cost is a method used for computing product cost. It is sum total of all variable components which include Variable material cost, Variable labor cost and variable manufacturing
To determine:
Define variable cost and identify two variable cost
![Check Mark](/static/check-mark.png)
Answer to Problem 1DQ
Solution:
Variable cost (in $) is sum total of
Variable material cost ($) xxx
Add: Variable labor cost ($) xxx
Add: Variable manufacturing overheads ($) xxx
Variable cost ($) xxx
Note: Please note that question does not contain any numerical data, so “solution” part incorporates only such formula.
Further, Raw material cost and Labor cost will be treated as Variable cost.
Explanation of Solution
Variable cost:
The main saying about variable cost is that:
“Per unit Variable cost remain same and changes in totality.”
Total variable cost is computed by multiplying per unit variable cost with nos. of units produced. As units produces changes, variable cost changes in totality.
It is used in conducting decision making regarding sale of product. As fixed cost always likely to occur whether product manufactured or not. So it helps in decision making in the way that product can be sold if only variable cost will be recovered or say for computing Break-even point.
Variable cost used in computing contribution with the help of formula:
Contribution: Sales- Variable cost
Identification of two variable costs:
Raw material used in manufacturing finished product is treated as Variable component.
It fulfills all the conditions of having a part of variable cost. As if no finished product is manufactured, no raw material component required. Further as much as production is done, raw material requirement stands increased.
So raw material cost is variable cost.
On the base of same context as in raw material, direct labor hours cost also treat as variable cost. As much as units will produce, per direct labor hour used in manufacturing per unit gets multiplied or vice versa.
Conclusions:
Raw material cost and Labor cost will be treated as variable cost.
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Chapter 21 Solutions
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