Test Bank for Managerial Accounting, Binder Ready Version 6th Edition

Variable costs:

Variable costs tend to vary in direct proportion to the volume of production. In other words, if volume of production increases, total variable cost also increases and vice versa,

Example:

Direct material, direct wages, Power, Royalties, and Small tools etc

Fixed costs:

Fixed costs remain constant in total amount over a specific range of activity for a specific period, these do not increase or decrease when the volume of manufacture changes.

Example:

Building rent, Managers salaries, and Insurance

Summary of the Case:

It was decided in a labor agreement that one meal of up to $ 12 shall be free for the employees and the cost above that shall be deducted by the Company from the Salary of the employees. Since the amount was deducted from the salary of the employees, there was a dispute.

Sunk Costs are the costs which are incurred and cannot be recovered.

a)

Identify the costs in nature:

Here we have to identify the Variable, Fixed and Sunk Cost; hence we must understand the meaning of each of the costs:

In R hotel, costs classification is as follows:

Variable costs are meat cost and salad ingredient cost.

Fixed Costs are the Costs of the Heat, Light and Power etc.

Sunk Cost is Oven Cost.

Opportunity cost is the cost of the best alternative forgone.

Example:

If a company has $10,000 cash, it can either buy shares or invest in bank @10% rate of interest. If the company earns more than 10% return from buying shares, no opportunity cost is incurred. If the company earns less than 10%, say 8%, then opportunity cost would be 2% (10%-8%).

b)

Identify the source leads to conflict between to management and employee:

The Source of conflict between the Management and Labor is the deduction of the salary of the employees as the employees were in the impression that by no means the cost can go ahead of $ 8 while the Company calculated the cost of meal as $ 22.

The wordings of the labor Agreement should be:

“Workers shall receive one free meal per shift up to the cost of $ 12 free and if the cost of meal to the Company goes over and above $ 12 it shall be deducted from the Salaries of the Employees”.