Cost can be divided into fixed and variable and by considering into fact that fixed and variable cost can be unarguably split into two, even though they behave differently based on the level of sales of volumes. Since, cost is used in every field to determine the price of an item and the unit sold. Two of the main components of cost are fixed and variable cost and is used to differentiate between the costs that have no direct correlation to business and those that do. Definition:- Fixed cost is not affected by the changes in the sales, they have slight relationship to the business and they do not change considerably when the sale increase or decrease. Fixed cost is set for particular period of time and changes occur during the specific time. Since, fixed cost does not change directly some of the examples of fixed cost are insurance premium, real estate taxes etc. For example, ‘an increase in the cost of insurance premiums may be attributable to an insurance company’s perception of increased risk associated with higher volume. Even though the increase in insurance cost is somehow related to an increase in volume, the cost of insurance is still considered a fixed cost’ (Tiffin, 2007). Other component of cost is variable cost changes frequently do not haves specific set period. Variable costs can be aptly defined as," which increase directly in proportion to the level of sales in dollars or units sold”. Depending on the type of business, some examples would be cost of goods sold, sales commissions, shipping charges, delivery charges, and costs of direct materials or supplies, wages of part-time or temporary employees, and sales or production bonuses. Both fixed and variable cost elements are components of mixed or semi-vari... ... middle of paper ... ...the equation for a straight line as follows: Y = $3,400 + $0.80X Hence the above example shows that costs can be determined as either fixed or variable even in a semi variable cost. In conclusion cost can be divided into two to find the exact amount of sale of an item sold and purchased by the customer. All fixed cost can be variable cost since, variable cost change often. Reference • Tiffin, R., (2007) Finance and Accounting Desktop Guide: Accounting Literacy for the Non-financial Manager 2nd ed., London Thorogood. • Hansen, D., Mowen, M., & Guan, L., Cost Management: Accounting & Control 6th ed., Mason, Ohio: South-Western • Dittmer, P. & Keefe, D., (2009) Principles of Food, Beverage and Labor Cost Controls 9th ed., Hoboken, N.J John Wiley & Sons, Inc. (US). • Weetman, P. (2006) Management Accounting, FT/Prentice Hall (Pearson Education)
Fixed expenses are those that will be there everyday the lodge is open regardless of the number of skiers. The Lodge is open 200 days per year and the cost of running the new lift is $500 per day for the entire 200 days giving us $100,000 in fixed costs. Variable costs are the expenses based on the number of customers. There is an additional $5 expense per skier per day associated with the new lift. If there are 300 skiers multiplied by $5 each multiplied by the 40 days that they are expected to be on the lift, we will have $60,000 in variable expenses.
Rocket-Blast, LLC, a beverage maker, has seen its profit margins reduced which presents a real problem for the company going forward (Precord & Macdonald, nd). Management has decided that operating costs must be reduced in order to increase profit margins to
[1] Noreen, Eric W., Brewer Peter C., et al., Managerial Accounting for Managers, Second Edition, McGraw-Hill/Irwin, New York, NY, 2011.
[4] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 3, Cost Assignment, p. 54-59
1) Total Variable Costs are 60% of Total Costs; While the other 40% are from fixed costs.
Variable costs: “Variable costs are costs that vary with the volume of activity”2 and they are: direct labor, Materials, Material spoilage & direct department expenses.
Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
The average cost maintains the full cost of the objective divided by the number of units of provided service while the marginal cost refer to the additional cost incurred as a result of providing one more service unit (Finkler et al., 2013). The fixed cost refrains from changing based on changes in volume of service units while variable cost, on the opposite end, varies in cost based on changes in volume of service units (Finkler et al.,
...n a mix of fixed and variable costs as well as other influences such as learning curves, the manufacturer will experience reduced incremental costs for each additional unit purchased above each tier’s minimum purchase quantity. The main goal of the below methodology is to capture the inefficiencies of minimum purchase quantities and purchase based on true costs.
Product costs must be transferred from Finished Goods to Cost of Goods Sold as sales are made. This requires a correct and accurate accounting of product costs per unit, to have a proper matching of product costs against related sales revenue.
g is an important tool that can help management in making informed decision. Though it is not legally required but still it is necessary to run an entity effectively. Cost accounting is turned toward the future. There are different methods of costing in Cost Accounting: Absorption costing and Variable costing. Both have some merits over the other.
For example: with the increase of the number of products produced, the cost of operating a machine also increase. Second we have batch level costs which is associated with batches; producing a multiple units of the same product that are processed together is called a batch. The third type is product level costs which arise from any activity in order to support the production of products. The fourth and the last type is facility level costs, this costs cannot be determined with a particular unit, product or batch; this costs are fixed with respect to batches, products and number of units produced. A single measure of volume is used for allocating costs to each service or product in traditional method for example: direct material cost, machine hours, direct labor cost and direct labor hours. A cost driver is an activity that generate costs, it can be generated by two types of costs the first is a particular machine 's running costs where the costs is driven by production volume as machine hours; the second is quality inspection costs where the cost is driven by the number of times the relevant activity occurs as the number of
Shields, M., & Young, S. (1992). Effective long-term cost reduction: a strategic perspective. Journal of Cost Management , 6 (2), 16-30.
Some fixed costs are depreciation, interest, insurance, & fees. Some variable costs are gasoline, tires, and maintenance on the vehicle. “The largest fixed expense associated with a new automobile is depreciation, the loss in the vehicle’s value due to time and use”(Kapoor, Dlabay & Hughes, 2012). An automobile purchases price might be cheap but when factoring in the fixed and variable cost the automobile could possibly cost more than expected. Websites like Intellichoice.com can help research and compare vehicle costs. This website shows the shopper how much it cost to own the vehicle for 5 years. When researching a vehicle to purchase it is important to consider these costs in order to make a good
Kinney, Michael R., and Cecily A. Raiborn. 2013. Cost Accounting: Foundations and Evolutions, 9th Edition. Cengage Learning.