Question

Accounting: What the Numbers Mean (12th Edition),Chapter 16, problem 17e Step 2 variabl overhead and fixed overhead calculation not understood. where did the 20% of total in the question equate to 20% of $80 and how did 100% of labour equate to 80% of $80?

Answer 1

Fixed overhead is the amount of expenditure, which will always be included in the cost, whether you do something or not. It is the fixed cost.

and variable cost is the expenditure which will increase with the increase in production. And labour is one of the fixed costs like electricity ie. higher the production, higher the units of electricity. Likewise it is for labour.

Therefore, when the cost of making 1 unit of output is $80.

In this total cost of $80, 20% ie $16 is the fixed cost.

While the varaible cost is 80% ie $64

And the contribution % will be 20%.

As even if you increase the output, the variable ocst will remain the same with relation to per unit of output. But your fixed cost will decrease proportionately with every increase in your output