How to Calculate Average Fixed Inspection Cost per Activity Unit?
When analyzing the costs related to inspection activities, it is essential to understand how to calculate the average fixed inspection cost per activity unit. This metric helps businesses evaluate the efficiency and cost-effectiveness of their inspection processes.
First, we need to determine the total fixed inspection cost, which remains constant regardless of the volume of activity. This cost includes expenses such as salaries, equipment maintenance, and overhead related to inspection activities.
Next, we identify the number of activity units, which in this case refers to machine-hours. This represents the level of activity or production volume that influences inspection costs.
Once we have the total fixed inspection cost and the number of activity units, we can use the formula mentioned earlier to calculate the average fixed inspection cost per activity unit.
Example Calculation:
Let's consider the following scenario:
Total fixed inspection cost = $183,446
Number of activity units = 7,400 machine-hours
Using the formula: Average fixed cost per unit = $183,446 / 7,400 Average fixed cost per unit = $24.79Therefore, the average fixed inspection cost per activity unit at an activity level of 7,400 machine-hours in a month would be $24.79.
By calculating this metric, businesses can gain insights into the cost structure of their inspection activities and make informed decisions to optimize efficiency and reduce costs.