Cost Management Systems/Probability and Distributions

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  Assignment Details

Cost behavior and cost classifications are key components to efficiently utilizing managerial accounting techniques.  In order to make decisions, accountants and managers must be able to correctly identify and classify each cost associated with a given product or service.   

Using your personal knowledge or the internet to select a product or service.  The product or service does not have to be an actual product or service – it can be completely fictional.  For the selected product or service, identify at least 5 costs involved with the product or service and complete the following questions.  

• Classify each cost as direct or indirect. 
• Identify the cost behavior as either variable, fixed or mixed. 
• Provide a brief (2 or 3 sentences) on the relationship of these costs. 

Please note you will need to make some assumptions about the product or service.  Internal product information is generally not available to the public so you will need to make some educated guesses about what may be required.  

Here is an example to help get you started:

Product: toothbrush
Costs: 

1. Plastic for handle (direct materials, variable)
2. Material for bristles (direct materials, variable)
3. Plant electricity to run equipment (indirect, fixed)
4. Labor to assemble each toothbrush (direct labor, variable)
5. Glue/Adhesive to hold bristles (indirect, variable)

Relationship:  As the number of toothbrushes made increases, the direct materials and direct labor will also increase to meet the demand.  Electricity is required to operate other aspects in addition to the equipment so this a shared cost across all functions.  Electricity is necessary cost for all operations and not solely for the production of toothbrushes.

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This discussion has 2 parts:

1. Looking at probability in research; which do you believe is the best approach between classical, empirical, or subjective? Explain. 
2. When working with research, would you rather use conditional or joint probability? Explain. 

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(1)

Research involves measurement scales and there are four types. In data collection, what sources of data would you use and how would you establish reliability and validity? Why did you chose those specific data samples?

In my data collection I would use validity. The validity refers to the degree in which our test or other measuring device is truly measuring what we intended it to measure. The concept of validity becomes more complex. It’s a construct accurately measured.

Reliability is synonymous with the consistency of a test, survey, observation or other measuring device. It is coefficient often the statistic of choice in determining the reliability of a test. It measures the intensity and direction of a relationship between two or more variables. You have to consider to if their results was accurate.

In this case, I would use nominal, and interval scales together with sources of data such as primary, and secondary sources. I would establish reliability in the sources of data by ensuring that information is consistent, and gives the same result. If the sources of data gives the information I need or measures what I expected it to, then I would have established their validity. The reason for choosing those specific data samples is because they are commonly used in research.

What types of data collection strategies and research design have you experienced, whether it is for work or through educational means?

There are sources of data collection that I have used in research for interviews, observations and review of documents. At work and school I have had types of data collection strategies and research. Since I am the manager at work I do all the interviewing for our jobs. I also have to do all paper work involved including the research on that person. At work is where I mainly use the types of data collection strategies and research.

The interview is the most common source of data. A person to person format. An importing skill is being able to ask questions in such a way that the respondent believes that he or she can talk freely. It can be difficult at times but it requires skill and experience.

The observation is generally spending a prolonged amount of time in the setting. Record notes to assist in determining what the observed events might mean and to provide help for answers.

I agree that interviews, observations and review of documents are some of the types of data collection strategies I have also experienced. Undeniably, interviews are common in collecting data from job recruits in the workplace. It is good to note that some research designs like case study designs, cross-sectional or the cohort design are used in most of the research studies.

(2)

Research involves measurement scales and there are four types. In data collection, what sources of data would you use and how would you establish reliability and validity? Why did you choose those specific data samples?

In developing or improving processes, we use a little of each of ordinal, nominal, interval and ratio. The nominal, interval and ratio we use data collected through certain time periods like for example an influx of new hires during a specific time frame. This allows us to see how well our training program is working and helps identify areas for improvement. Collecting the data we use observational data as our main source by use of face to face interviews, teleconferences as well as just sitting back and watching a process and collecting the notes and remarks from those players in the process. Once we collect the data we validate typically through a second set of eyes or another workgroup to verify our findings of the entire process. We choose to use observational data more because it makes us more aware of what is actually happening versus what a chart says in a PowerPoint presentation, you wouldn’t believe how many decisions are made based of a chart without considering the task being performed.

I agree that ordinal, nominal, interval and ratioare the four types of measurement scales commonly used in research. This can be used when using primary sources of data like collecting data for new hires. Once the data is collected it is imperative to note that its reliability is established by the consistency of the data in giving similar results upon different treatments. Further, data validity is established by proving that the data measures or predicts what it was supposed to measure or predict.

What types of data collection strategies and research design have you experienced, whether it is for work or through educational means?

At work, most of my research on any given issue is through Face-to-face or Telephone interviews. Example we had a shelf life issue not only at our site but at other sites as well, through face to face interviews and teleconferences with the other sites we came up with a process that allows us to consistently find a shelf life for a particular item. I found in doing this research that when you are face to face in a room together it is easier to get things done, most of the time the scheduled phone conferences were hard to schedule because of time zone differences and work schedules and less was accomplished over the phone.

I concur with you that at work, face-to-face or telephone interviews are some types of data collection strategies that we experience. In the collection of data however, it is good to realize that the strategies are encompassed in research designs such as case studies, causal designs, cohort designs, cross-sectional designs, descriptive designs, and experimental designs just to mention a few.

(3)

What is taken into consideration to figure out the contribution margin? Contribution margins=sale-variable cost. Sales and cost are taken into consideration to complete the contribution margin. Sales affect, net income, and profit are determined by contribution margins.

I agree that both sales, and variable costs are taken into consideration to figure out the contribution margin.

How is the breakeven point determined?

To find the breakeven point you must know your total overhead cost, then take total number and divide and divide it in dollars per unit by the contribution margin. This is how the breakeven point-determined. For example if $5000 is your overhead $50 is the price that each will be sold at. So $5000 divided by 50 =500 which is y our breakeven point.

How is the breakeven point determined?

Break-even point can be in the number of units. Therefore, the price, fixed, and variable costs are important parameters in determining break-even point. To determine the number of units needed to break-even, fixed costs divides the difference between the price, and variable costs. That is; fixed costs/ (price-variable costs) =number of break-even units.

What is needed to determine the operating income? Operating income are cost that come from operating activities like supplies for the office, electricity, water, and heat. Operating income takes a company’s gross income and subtracts and depreciation and expenses used to operate the company. Operation income is used when companies are potentially about to experience a buyout.

I agree that in order to determine the operating income, the variable, and fixed costs are subtracted from the total sales. The operating income is earnings before interest and taxes (EBIT).

Would the contribution margin, breakeven point and operating income change if the compensation method for employees is modified? If there is any change in compensation whether it be an increase in pay from a raise or from the wages for the workers being increased contribution margin, breakeven point and operating income will all be altered.

I agree that the contribution margin, breakeven point and operating income would change or be altered if the compensation method for employees is modified. This because compensation whether as variable cost (commissions) or fixed cost (salaries), will change all the three aspects.

(4)

What is taken into consideration to figure out the contribution margin? Total variable costs are considered along with selling price per unit. The total variable costs per unit are subtracted from the selling price per unit to arrive at the contribution margin. The contribution margin represents the remaining amount that covers fixed costs and profits (Wild, 2014, p. 179).

I concur with you that the total variable costs is taken into consideration to figure out the contribution margin. Sales are also taken into consideration. I also agree that the contribution margin per unit requires, variable costs per unit, and selling price per unit. This implies that, to get contribution margin per unit, variable costs per unit is subtracted from selling price per unit.

How is the breakeven point determined? Breakeven point can be calculated using units of sales or in sales dollars. If using units, you would divide the fixed costs by the contribution margin per unit. This would yield the total number of units needed to achieve breakeven point, with sales covering total costs. If using sales dollars, then you would need to divide fixed costs by the contribution margin ratio. This would yield the total amount of sales dollars needed to achieve breakeven point (Wild, 2014, p. 180).

I agree that the break-even point in terms of units is determined by dividing the fixed costs by the contribution margin per unit which is the variable costs per unit subtracted from selling price per unit.

What is needed to determine the operating income? To determine operating income, dollar amount of sales, variable costs, and fixed costs are needed. Variable costs are subtracted from the sales which provides the contribution margin. Fixed costs can then be subtracted from the contribution margin which leaves the operating income amount (Wild, 2014, p. 184). This is also known as earnings before interest and taxes (EBIT).

I agree that operating income is simply earnings before interest and taxes (EBIT). In totality, operating income is the total contribution margin with a deduction of the total fixed costs.

Would the contribution margin, breakeven point and operating income change if the compensation method for employees is modified? These would all change if the compensation method for employees were modified. An example would be if an organization moved from paying its employees a fixed salary to hourly pay. If the company grew and increased its units sold, it would have to now pay overtime to the manufacturing employees. The increase in labor costs would decrease contribution margin, increase the breakeven point, and decrease operating income.

Yes, modifying the compensation method for employees changes the contribution margin, break-even point and operating income. If employees are paid per hour instead of a fixed salary, the hourly pay becomes a variable cost, and this affects the contribution margin by decreasing it. Similarly, breakeven point and operating income are also affected.