Chapter 8, Problem 1MCQ

To determine

Fixed Costs:

Fixed costs are those costs which do not change with the change in the production. Whether the production is 0 or 100 fixed costs will remain the same. Fixed costs are stagnant in nature in short term but in the long run they also start varying with the change in production.

Variable Costs:

Variable costs are those costs which change proportionally with the change in the units of production. As the production units rise or declined; there will be a change in the variable costs.

To identify: Budgeted fixed costs and variable costs.

Explanation of Solution

Given,
Budgeted production and sales are 24,000 units.
Budgeted fixed costs are $300,000.
Budgeted variable costs are $246,000.
Decline in the level of activity is 20,000 units.

Formula to calculate revised variable costs is,

   $\text{Revised variable cost}=\frac{\text{Budgeted variable cost}}{\text{Budgeted units}}\times \text{Actual units}$

Substitute $246,000 for budgeted variable cost, 24,000 units for budgeted units and 20,000 units for actual units.

   $\begin{array}{c}\text{Revised variable cost}=\frac{\$246,000}{24,000\text{ units}}\times 20,000\text{ units}\\ =\$205,000\end{array}$

Hence, fixed costs remain unchanged and revised variable costs are $205,000.