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Chapter 3 - Basic Cost Management Concepts
3-16
3-42 (continued -1)
3. The growth of the company globally means that the company will be
more exposed to the effects of foreign currency fluctuations. For
example, a falling dollar relative to the Euro will lower the effective
cost of PGI’s U.S.-based services to European customers, thereby
the Euro. The same currency issues apply should the company’s
business continue to grow in China. In this case, the currency effect
is likely to be smaller, since the Chinese currency has not changed
much relative to the dollar in recent years.
Chapter 3 - Basic Cost Management Concepts
3-17
3-43 Fixed, Variable and Mixed Costs (10 min)
Department A fixed
Department B variable
Department C mixed
Department D mixed
Department E variable
3-44 Fixed, Variable and Mixed Costs (10 min)
Department A mixed
Department B mixed
Department C fixed
Department D variable
Department E variable
Chapter 3 - Basic Cost Management Concepts
3-18
3-45 Strategy; Variable and Fixed Costs (20 min)
1. The variable costs for Zipcar would be the same as for any car
owner – gasoline (customers do not pay for gas, but instead a simple
hourly rate) and upkeep. The fixed cost are the largest part of total
cost, the cost of the car, insurance, and the parking spot, among
others.
2. The key challenge facing Zipcar is the entrance of competitors such
as Hertz and Enterprise car rental agencies. Zipcar has no “barrier
to entry,” and is vulnerable to new competition.
A good question for class discussion: “How will Zipcar be able to
compete effectively against the larger companies?” Is the Zipcar
concept a commodity which can be copied and used by the other
companies, or are there some features and services that can make
environmental contribution over the last 10 years, ideas that might
have traction with those customers who want to make a statement
about their commitment to the environment.
Since fixed costs are a key component of total costs for the
company, the ability of the company to grow at a fast rate is critical.
A larger company, with more members and more usage of its
vehicles, would be able to more easily cover those fixed costs. As
which must be covered by that fixed hourly rate.
Source: “The Business of Sharing,” The Economist, October 14, 2010;
Adam Aston, “Growth Galore, but Profits are Zip,” Business Week,
September 8, 2008, p 62. Also: Mark Clothier, ”In The Race for the Car-
less, Can Hertz Outrun Zipcar?” Bloomberg Businessweek, April 2, 2012,
pp. 23-24.
Chapter 3 - Basic Cost Management Concepts
3-19
3-46 Interpreting Average Cost (15 min)
This question is based on a report by Paul Raeburn, “Hybrid Cars: Less
Fuel but More Costs,” Business Week, April 15, 2002, p 107. See also
information on the history of gas prices from January 2000 to the present at
the U.S. Department of Energy website:
http://tonto.eia.doe.gov/oog/info/gdu/gaspump.html
CAFÉ standards have remained at 27.5 mpg since 2002 but have been
increased by 2007 legislation which required 35 mpg by the year 2020. In
May 2009, the Obama admiration pushed the 35MPG target back to 2012,
and in August 2011 legislation was passed that required 54.5 mpg by 2025.
The urgency of energy sustainability, oil independence from non-domestic
supplies, and climate change have substantially increased the efforts to
improve vehicle efficiency and reduce vehicle emissions.
The rapid increase of gasoline prices in 2004-2011 should enhance the
interest in the issue discussed. The costs shown for each gallon of
For example, since in this case total cost per gallon of gas depends
on both variable costs (gasoline) and fixed costs (vehicle cost), the
determination of an average cost requires an assumption of activity level.
While variable costs (the price of gasoline) are constant per unit, for the
number of gallons purchased, theaverage per-gallon fixed costof
purchasing the vehicle will depend on the number of miles traveled. Car
owners who travel relatively few miles will have large average fixed costs in
Chapter 3 - Basic Cost Management Concepts
3-20
3-46 (continued -1)
The Business Week report does a good job in this regard by reporting
that the assumed activity was 12,000 miles per year for 12 years. This
cost is determined in this case. The key idea to bring out is that average
fixed cost is determined by some pre-determined activity level.
CAFÉ Standards links:
http://www.nhtsa.gov/fuel-economy
Chapter 3 - Basic Cost Management Concepts
3-21
3-47 Interpreting Average Cost (15 min)
This question is based upon the following: Vincent Ryan, “Treasury:
Bigger is Better,” CFO.com, November 9, 2010; “How Does Your Finance
Department Measure Up?”Journal of Accountancy, January 1997, pp50-51.
The main point of this exercise, as for 3-46 above, is to help the student
understand the importance of taking activity levels into account when
interpreting average cost information.
The two articles show, as represented by the information presented in the
fall. Average fixed cost would continue to fall with increasing numbers of
transactions, until the firm felt it necessary to increase capacity in the
accounting department, thereby increasing fixed costs.
Thus, the data presented is as we would expect – larger firms will have
lower average costs. We would not expect otherwise. Average fixed
costs should be lower for the larger firms.
Chapter 3 - Basic Cost Management Concepts
3-48 Average Cost (15 min)
The percentage increase in total variable manufacturing cost, averaging
both labor and fuel costs, is 7.5% for Company A and 6% for Company B.
The increase is higher for Company A because it has a higher percent of
fuel costs which have risen faster than labor costs.
Calculations:
3-23
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3-48 (continued -1)
Here is another example. The recession in the early 1980s caused an
increase in unemployment for workers at all educational levels. Also, in
the great recession, during 2009, the unemployment rates were higher for
highly educated group than in 1983, and this group’s unemployment rate
was lower (in both periods), the effect was to bring down the overall
unemployment rate in 2009 relative to 1983.
Source: Carl Bialik, “When Combined Data Reveal the Flaw of Averages,”
The Wall Street Journal, December 9, 2009, p A21.
Chapter 3 - Basic Cost Management Concepts
3-24
3-49 Classification of Costs; Customer Profitability Analysis (15 min)
1.
Direct (D) or
Indirect(I)
1. Staff salaries
D
2. Rent on office and work space used
by the company
I
3. Licenses and fees
I
4. Supplies; grooming supplies, and
related items
D
5. Medications
D
6. Legal fees
I*
7. Accounting services provided part-
time by practicing accountant
I
8. Pet food
D
9. Utilities for office and work space;
electricity and water
I
10. Fire insurance for office and work
space and its contents
I
11. Liability insurance for the company
business
I
*It may be possible to trace some portions of legal fees to specific customers, so that
the cost would be direct and not indirect
2. Pet Partner could use the information to identify costs that are
traceable to each customer (the direct costs) and determine over a
period of a month (or year) whether the direct costs traced to the
Chapter 3 - Basic Cost Management Concepts
3-25
3-50 Classification of Costs (15 min)
Parts 1 and 2
Fixed(F) or
Variable (V)
Product (P) or
Period (PD)
1. Food costs including pizza dough,
olive oil, tomato sauce, etc.
V
P
2. Salaries for drivers
N*
PD
3. Salaries for telephone operators
N*
PD
4. Salaries for cooks
N*
P
5. Insurance for drivers
F
P
6. Utilities; water and electricity
V
P/PD (allocated to kitchen
and other space)
7. Advertising
F
PD
8. Discount coupons
V
PD
9. Food handling licenses,
inspections, and fees
F
P
10. Accounting and payroll services
F
PD
11. Cooking supplies
V
P
12. Cleaning supplies
V
P
13. Mortgage payments
F
PD
14. Insurance on facilities
F
PD
*Note for Class Discussion: these costs are fixed unless Papa’s manager
schedules drivers, operators, and cooks so as to eliminate slack time, in
which case the cost of the drivers, operators, and cooks could be
considered variable costs
3. There are a number of possible answers. Inefficiency and waste in
the use of utilities or food products could be considered an
