Outback Mining Ltd (OML), which mines ore in Australia’s north-west uses a calendar year for financial reporting purposes. The following selected costs were incurred in December, the low point of activity, when 1400 tonnes of ore were extracted.
Straight-line depreciation……………………………………………$30,000
Charitable contributions………………………………………………12 000
Mining labour (Including on costs)………………………………….315,000
Royalties…………………………………………………………….140,000
Trucking and hauling………………………………………………..280,000
Peak activity of 2700 tonnes occurred in June, resulting in mining labour costs (including on costs) of $607500, royalties of $224,500, and trucking and haulage costs of $360,000. The trucking and hauling costs exhibit the following behaviour:
Less than 1500 tonnes……………………………………..$240,000
From 1500-1 899 tonnes……………………………………280,000
From 1900-2 299 tonnes……………………………………320,000
From 2300-2 699 tonnes……………………………………360,000
OML uses the high-low method for analysing cost behaviour.
Required:
1. Assuming that royalties are a semivariable cost, classify each of the other four costs listed above in t.rms of their behaviour as variable, step-variable committed fixed, discretionary fixed, step-fixed, or semivariable, Show calculations to support your answers for mining labour costs.
2. Calculate the total cost for next February when 1650 tonnes of ore are expected to be extracted.
3. Comment on the cost effectiveness of hauling 1500 tonnes with respect to OMLs trucking/hauling cost. Can the company’s cost effectiveness be improved? How?
4. Distinguish between committed and discretionary fixed costs. If OML were to experience severe economic difficulties which of the two types of fixed costs should management try to cut? Explain why.
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