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Management Accounting

Essay by   •  April 3, 2011  •  381 Words (2 Pages)  •  1,413 Views

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The fixed cost of running the restaurant is the cost that is not immediately affected by changes in the number of hamburgers sold. The fixed cost here is the building rent. The variable cost is the raw materials because there is a direct correlation between the total annual costs and the units sold. This is based on the assumption the costs are totally fixed and totally variable and the "...relationship between the cost and cost-driver is linear" and within the relevant range (Horngren, Sundem, Stratton, 2005, p. 48).

Table 1 distinguishes the unit costs and displays a different perspective. The unit cost of a hamburger is determined by dividing the total annual cost ($650) by the total annual units sold (1000). The variable unit cost is $.65 no matter how many are sold. However, the fixed unit cost decreases correlate with the total annual number of units sold. To calculate the unit cost of the fixed variable (building rent), divide the total fixed cost ($9000) by the total number produced (1000). The fixed unit cost when 1000 units are sold is $9 (9000 / 1000 = 9), but it changes to $1.125 when 8000 hamburgers are sold (9000 / 8000 = 1.125).

Table 1 - Unit Costs

1000

Annual Units Sold 6000

Annual Units Sold 8000

Annual Units Sold

Raw Materials

(cost/hamburgers)

Variable cost $.65 $.65 $.65

Building Rent

Fixed cost $9 $1.5 $1.125

Total annual cost must not be confused with unit cost of fixed and variable costs. Table 2 identifies the total annual costs based on units sold. The total annual cost of the raw materials (cost for hamburgers) increases and the number

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