BUSN 278 – When you’re dealing with mixed cost

Subject: Business / General Business QuestionEach answer must be at least 100 words.

1. When you’re dealing with mixed cost items, such as utilities or possibly shipping costs, the High Low method is a good way to normalize your total costs and better predict your expenses. On the lessons tab, we instructed to ensure that our High and Low values are not outliers…due to unusual behavior. Because if they are, these numbers are not very reliable to normalize your costs.
So to help you guys format your thoughts on how you’ll work on this week’s project assignment, I’ll turn your attention to Chapter 3 in our text, where we’re told that when we build a budget, we are building a model of our business and the relationship between volume and costs.
How so?
2. A coworker comes to you with the following problem: “I provided my boss a projection of factory overhead using the high-low method. He was unhappy with the results and told me to do more work and not return until I had a lower cost estimate. My initial analysis was based on data points for the last 24 months. By dropping the three highest data points, I was able to get a lower cost.” The coworker was unethical. Under what circumstances, do you think, would it be appropriate to remove such data? Perhaps, if you had enough data to analyze and prove that the removal would not have a negative consequence?
3. I’d like to take a look at Materials Price Variance as explained in this document. A negative Materials Price Variance is considered to be good.
Are there any circumstances where a negative Materials Price Variance is not good?
4.
So we’ve got some tutoring aids in doc sharing this week, and in theStandard Costs and Variance Analysis document, I’d like to go to the very end and try an exercise withSales Revenue Variance.
AQ: Actual quantity soldAP: Actual sales price per unitSP: Standard or Budgeted price per unitSQ: Standard or Budgeted quantity (at actual level of sales)
Total Sales variance = sales price variance + sales volume quantity variance
Sales Price Variance: (AQ x AP) – (AQ x SP) (A positive balance signifies that our actual selling price was higher so is considered favorable.)
Sales Volume Quantity Variance: (AQ x SP) – (SQ x SP) (A positive balance signifies that we sold more than expected so is considered favorable.)
So let’s mock up some numbers for The Cutting Edge. Calculate the Sales Revenue Variance and decide if it is favorable or unfavorable.

Sales per service/unitLawn Mowings Weed TreatmentsUnits UnitsBudgeted 35,000 43,000Actual 22,000 38,000Cost of service and Revenues are belowLawn Mowings Weed Treatments$ Thousands $ ThousandsRevenue 200 245Direct labor 15 12Direct Material 20 10Variable Costs 6 7Fixed Costs 4 3

 

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