ShmoopTube

Where Monty Python meets your 10th grade teacher.

Search Thousands of Shmoop Videos


Cost Accounting Videos 27 videos

Cost Accounting: What is a Cost: Cost Versus Expense?
1 Views

What is a Cost: Cost Versus Expense? Cost and expense are pretty similar terms when looking at traditional definitions but they’re a little diffe...

Cost Accounting: How Can Unit Fixed Costs Mislead the Misled?
3 Views

How can unit fixed costs mislead the misled? Unit fixed costs can be misleading because the fixed cost per unit decreases as production increases;...

Cost Accounting: What Is Differential Analysis?
2 Views

What is Differential Analysis? Differential analysis is a strategy used to make the best decision. Possible choices are compared to determine which...

See All

Cost Accounting: How Can Unit Fixed Costs Mislead the Misled? 3 Views


Share It!


Description:

How can unit fixed costs mislead the misled? Unit fixed costs can be misleading because the fixed cost per unit decreases as production increases; using unit fixed costs can make companies believe that their fixed costs are higher than they actually are, so they have to charge more for their goods to compensate.

Language:
English Language

Transcript

00:00

And finance Allah Shmoop How can unit fixed costs mislead

00:06

the misled Okay so you're in the wireless vibrating headset

00:12

business This year you spent a small fortune building all

00:15

the assembly and tuning elements you needed to crank out

00:18

tons of those headsets Well the initial cost was big

00:22

and the factory requires angle maintenance insurance and other costs

00:25

of about twenty five million bucks a year The factory

00:27

can handle production of up to a million units with

00:30

employees working nine hour days with loaded fully allocated costs

00:34

Buzz brain ink could produce these units for fifty dollars

00:38

each and wholesale them to places like Costco and Walgreens

00:42

and Wal Mart for one hundred dollars and well make

00:44

a nice living Things were generally running at capacity when

00:47

an order came in from China Yes it seemed like

00:50

almost the whole country wanted these things A one time

00:54

special order for a million units Special price Forty five

00:57

dollars each So this is a problem How can you

01:02

sell a product for less than it costs you to

01:04

make that product right Like here it cost you fifty

01:07

bucks and they want to buy him for forty five

01:09

so you can't You can't lose money on every sale

01:12

and I hope to make it up involving him or

01:14

something It doesn't work that way Well at least not

01:16

unless you live in either idiot ville or bankruptcy corner

01:19

So you reject that huge order from China that would

01:22

have lost you a whole bunch of money But then

01:24

some widely manager who actually bothered to pay attention to

01:27

this video said Hey wait a minute Does it really

01:31

cost us fifty bucks a unit to make these things

01:34

We have twenty five dollars of hard raw material costs

01:37

but then we kind of arbitrarily allocated twenty five dollars

01:41

toe Amor ties the factory's twenty five million dollars a

01:44

year costs on the current full capacity of a million

01:48

units a year we currently produce After all we've run

01:51

the factory only nine hours a day Well everyone in

01:55

the meeting becomes silent All the suits realized that the

01:57

allocation and twenty five dollars per unit is way too

02:00

high If the factory was going to crank out say

02:03

two million units instead of just one well then all

02:06

the numbers would change That is for the additional cost

02:09

of five bucks a unit The factory could pay time

02:11

and a half two employees running a midnight to nine

02:14

a M shift and that would add just five million

02:17

dollars total to the annual cost time and a half

02:20

would be sought after by a lot of workers They

02:22

make twenty bucks an hour is normal time so they'd

02:24

make thirty bucks an hour for working the overnight shift

02:27

No problem filling those jobs in the factory quickly Meanwhile

02:31

making a second million units could lead to other good

02:34

things that make that twenty five dollar allocation seem even

02:37

further off the mark like being ableto ordered double the

02:40

raw materials and have much more power with their vendor

02:43

suppliers That is they'd probably get even more volume discounting

02:47

than they already did under just one million units worth

02:50

of stuff right volume purchasing If they're hard materials plastic

02:54

and wires and bent metal things in the vibrating unit

02:57

thing in the battery holder couldn't they get ten twenty

02:59

thirty percent less if they were doubling the size of

03:02

their order Yeah probably so that riel allocation of twenty

03:04

five dollars have cost is now squishy and suspect and

03:08

almost a company murderer Well the order from China is

03:11

a one time thing Is it fair to lumpy in

03:13

that one time deal with the normal operations of the

03:16

business Could you argue that well operationally it makes sense

03:19

to keep the allocations as they are I keep the

03:22

twenty five dollars a unit allocation for that factory maintenance

03:25

costs for the first million and then on the extra

03:27

cost of human labor Well just add that extra five

03:30

bucks a unit to the raw material costs of twenty

03:33

five bucks a unit to get a total marginal cost

03:36

of thirty dollars a unit for each one sold to

03:38

China for forty five dollars Right you making fifteen dollars

03:41

If you think about the accounting that way is it

03:43

fair to break them up like that Since China's orders

03:46

well probably will never happen again Maybe not the worst

03:49

idea to break them out separately anyway Think of it

03:51

this way You're starting a quote New unquote business for

03:54

the China Order Your regular operations represent the old business

03:59

The new businesses selling one year's worth of production in

04:02

China at nice profit margins fifteen dollars a unit You're

04:05

having toe higher up To do so you're having to

04:07

readjust union contracts and other things to accommodate for that

04:11

one year period If you just blended everything together for

04:14

a company wide two million units sold well then it

04:16

would kind of cloud the rial inputs and the rial

04:19

margins and the rial direct costs here So if you

04:22

think about things you almost rejected China's offer ordeal thinking

04:25

that you'd be losing five dollars a unit in doing

04:28

so But because someone on your staff watch this video

04:31

you wisely accept that offer and make fifteen dollars a

04:34

unit times a million And that's fifteen million box extra

04:37

for your company money you'd have otherwise rejected It's totally

04:41

fine If you want to send shmoop a percentage of

04:42

your gains here you know we do take gratuities You're

04:45

welcome

Related Videos

GED Social Studies 1.1 Civics and Government
39794 Views

GED Social Studies 1.1 Civics and Government

Fake News
11938 Views

How do you tell fake news from real news?

Finance: What is Bankruptcy?
260 Views

What is bankruptcy? Deadbeats who can't pay their bills declare bankruptcy. Either they borrowed too much money, or the business fell apart. They t...

Finance: What is a Dividend?
1777 Views

What's a dividend? At will, the board of directors can pay a dividend on common stock. Usually, that payout is some percentage less than 100 of ear...

Finance: How Are Risks and Rewards Related?
589 Views

How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...