Cost Management Consultant Case Study

Unit 3 Written Assignment

COST MANAGEMENT CONSULTANT CASE STUDY

Managerial Accounting (BUS 5110-AY2018-T3)

University of the People

Feb. 20, 2018

Definitions:

The fixed cost is the cost a company has to pay regardless of the volume and amount of operation, such as rent, employee salaries, administrative fees, advertising and property tax (Peavler, R. 2017). As the production activities increases the fixed cost remains constant (Walther, L. M. & Skousen, C.J. 2009). Fixed cost is the opposite of variable cost. Assume that a toy making company leases the manufacturing facility where the toys are assembled. Assume that the rent is 10,000 per month no matter the level of production. The rent is said to be fixed cost, because total rent will not change as output rises and falls (Walther, L. M. & Skousen, C.J. 2009). 

Variable Cost is the cost of running a business that changes with volume of activity. In other words, variable costs will vary in direct proportion to changes in the level of an activity. For example, direct materials, number of events, direct labor, sales commissions, fuel cost, and so on, may be expected to increase with each additional unit of output (Walther, L. M. & Skousen, C.J. 2009).

Mixed Cost describes a cost that has a mix of fixed and variable costs. For example, assume sales personnel at Bikes Unlimited are paid a total of $10,000 in monthly salary plus a commission of $7 for every bike sold. This is a mixed cost because it has a fixed component of $10,000 per month and a variable component of $7 per unit (Heisinger, K., & Hoyle, J. B.2012).

The total cost for an operation is the addition of fixed and variable cost (Marshall, H. D. McManus, W.M., & Viele, F. D. 2014). So, by applying the information above we can assign our fixed or variable cost in the case study.

Analyzing the data:

The cost data provided includes:

Floral costs, $200 per event, this is a variable cost since it depends on the volume, and if there is no events then there is no cost.  

Table arrangements, $100 per event, this is variable cost as above

Soft drinks and children snacks, $500 per event, variable cost as above

Annual allocated costs of tents and other structures, $500,000, it is a fixed cost regardless of the number of events I am doing.

Annual allocated costs of trucks and vehicles, $2,000,000, this is a fixed cost too, same explanation as above.

Annual costs related to maintaining permanent staff, $3,500,000, it is a fixed cost too, and it is paid regardless of the amount of operation.

Wage for temporary staff (paid per event), $1,800 per event. It is a variable cost and paid by event as it says. For this, if I don’t do the vent I don’t have to pay a temporary staff.

Provide a narrative that discusses the limitations of the data: We can calculate from the data provided (the chain of operations has $22,500,000 of revenue from 5,000 events that they have serviced) that the revenue from each event is = 22,500,000 /5,000 = 4,500 USD. This information will be used as the contribution margin per event since the data provided doesn’t explain if this revenue pertains to the events the company mixed with other operation.

In addition to this, I am not sure if the case is saying to give an estimate for the new event order as a new and special order, for this, I could treat it as special and recalculate the fixed cost.