Problem 1: Cost behaviour: Committed and discretionary costs: high-low method

Delta Mining Limited (DML), have 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 1 400 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 haulage

240 000

*incurred only in December

Peak activity of 2 700 tonnes occurred in June, resulting in mining labour costs (including on-costs) of $607 500, royalties of $224 500, and trucking and haulage costs of $360 000. The trucking and haulage costs exhibit the following behaviour:

Less than 1 500 tonnes

$ 240 000

From 1 500 - 1899 tonnes

280 000

From 1 900-2 299 tonnes

320 000

From 2 300-2 699 tonnes

360 000

DML uses the high-low method for analysing cost behaviour.

Required:

1.Assuming that royalties are a semi-variable cost, classify each of the other four costs listed above in terms of their behaviour as variable, step-variable, committed fixed, discretionary fixed, step- fixed or semi-variable. Show calculations to support your answers for mining labour costs.

2.Calculate the total costs for next February when 1 650 tonnes of ore are expected to be extracted.

3.Comment on the cost effectiveness of hauling 1 500 tonnes with respect to DML's trucking /haulage cost. Can the company's cost effectiveness be improved? How?

4.Distinguish between committed and discretionary fixed costs. If DML were to experience severe economic difficulties, which of the two types of fixed costs should management try to cut? Explain why.