Majestic Ocean Kayaking, of Ucluelet, British Columbia,  is owned and operated by Tracy Morben-Eeftink. The company offers a  number of guided kayaking excursions ranging from three-hour tours of  

Majestic Ocean Kayaking, of Ucluelet, British Columbia,  is owned and operated by Tracy Morben-Eeftink. The company offers a  number of guided kayaking excursions ranging from three-hour tours of  the Ucluelet harbor to six-day kayaking and camping trips in Clayoquot  Sound. The company is currently using a step-variable cost approach for  paying guides but wants to consider the impact of other approaches.

It is often necessary to predict how a certain cost will behave in  response to a change in activity (Garrison, 2015). For planning  purposes, a manager must be able to anticipate which of these will  happen; and if a cost can be expected to change, the manager must be  able to estimate how much it will change. To help make such  distinctions, costs are often categorized as variable, fixed, or mixed.  The relative proportion of each type of cost in an organization is  known as its cost structure. For example, an organization might have  many fixed costs but few variable or mixed costs. Alternatively, it  might have many variable costs but few fixed or mixed costs.

According to Garrison (2014), management accountants ordinarily  assume that costs are strictly linear; that is, the relation between  cost on the one hand and activity on the other can be represented by a  straight line. Economists point out that many costs are actually  curvilinear; that is, the relation between cost and activity is a curve.  Nevertheless, even if a cost is not strictly linear, it can be  approximated within a narrow band of activity known as the relevant range  by a straight line. The relevant range is the range of activity within  which the assumption that cost behavior is strictly linear is reasonably  valid. Outside of the relevant range, a fixed cost may no longer be  strictly fixed or a variable cost may not be strictly variable. Managers  should always keep in mind that assumptions made about cost behavior  may be invalid if activity falls outside of the relevant range. It is  important to note that the concept of the relevant range is important in  understanding fixed costs. Garrison (2014) also mentions that this  step-oriented cost behavior pattern can also be used to describe other  costs, such as some labor costs. For example, in healthcare, when a  nursing unit has a low patient census, management doesn’t automatically  layoff nurses when the number of admitted patients is below the low end  of the range. 

Conversely, management doesn’t look to hire additional  nurses with the patient census exceed the high end of the range. So, as  long as the census remains within a relevant range, personnel  levels are maintains at a constant level; however, if the low census  falls outside the range, management will need to consider their options:  1) layoffs or redistribute labor to other areas of the organization  when the volume is below the low end of the range OR hire additional  labor when the volume exceeds the high end of the range. There are  organizations that use cost behavior as a model for staff compensation,  which is being highlighted in this mini-case. Understanding costs and  their behaviors is a fundamental building block for managerial  accounting and finance.

Source:

Garrison, R., Noreen, E., & Brewer, P. (2014). Managerial accounting (15th ed.).   Columbus, OH: McGraw-Hill Education.

Unit Learning Outcomes

ULO 4. Apply various cost behavior in management decision making (CLO 2)

Directions

Initial Posting

(Initial Posting) Business is booming for the Majestic Ocean Kayaking  company as more American are deciding to vacation at home instead of  abroad. This means that more guides are needed to handle the increased  volume. As a member of the senior leadership team for Majestic Ocean  Kayaking, you, along with other management officials, are concerned that  the current step-variable approach used to pay the guides might not be  the most cost effective, which was voiced at a recent budget meeting.  The CEO has tasked the senior management team to prepare a position  paper that analyzes the current method of paying the guides to other  methods just as fixed cost or strictly variable. To complete this  analysis, you will need to collect relevant data, describe the problem,  solutions, and overall impact on the bottom line.  You will need to  include some discussion on the various approaches that can be used and  the pros and cons of each one.

This report should be prepared as a Microsoft Word document. There  is no minimum or maximum in terms of the word count; however, the  response should explicitly address all required components of this  discussion assignment. The document should be prepared consistent with  the APA writing style (6th edition) and reflect higher level cognitive processing (analysis, synthesis and or evaluation).