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)
[1] Noreen, Eric W., Brewer Peter C., et al., Managerial Accounting for Managers, Second Edition, McGraw-Hill/Irwin, New York, NY, 2011.
Variable costs, for a manufacturing company, are those costs that increase or decrease as production increases or decreases. If production increases, then variable costs will increase; if production decreases, variable costs will decrease. For Claire’s Antiques, examples of their variable costs would be manufacturing labor, raw materials, and manufacturing overhead. Examples of manufacturing overhead would be the utilities that are used in the production facility, and the oils and lubricants used in the machinery. Fixed costs in a manufacturing company are those costs that remain constant regardless of the level of production. Examples of fixed costs for Claire’s Antiques are: sales and administrative costs, rent and/or mortgage on the production facility, and depreciation. Semi-variable, or mixed, costs are costs that have both fixed and variable costs. An example of a semi-variable cost could be if Claire’s leases their delivery trucks, and the lease includes a mileage fee. The monthly lease would be considered a fixed costs, but the mileage fee would be a variable cost. (Hofstrand, 2007). In most cases, fixed costs are usually higher than variable costs, and can absorb a great deal of profits. Because of this, some companies may consider converting their fixed costs to variable costs.
Donal E. Kieso, Wegandt J. Jerry, Warfield D. Terry. (2012). Intermediate Accounting. Hoboken, NJ: Wiley.
1) Total Variable Costs are 60% of Total Costs; While the other 40% are from fixed costs.
Fixed cost is high for the container shipping industry such as vessel fees, container fees, and labor of loading and unloading. Variable cost is fuel cost, because the volatility of fuel price, so there is a potential huge impact on industry’s profit.
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.
[4] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 3, Cost Assignment, p. 54-59
...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.
The contained paper has been prepared with objectives of elaborating over the three different costing methods namely, Absorption/Full Costing, Variable/Marginal Costing, and Activity Based accounting. The first segment of the report seeks to define and illustrate the costing methods based on the personal understanding of the writer gained through the class room and the academic readings. Part two of the report takes a form of short essay, written critically to evaluate the application of standard costing and variance analysis to any size of business, and concludes with a verdict that whether or not standard costing and variance analysis is applicable to each business with consideration of its costs and benefits of the system.
Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
As such, there is material cost regulator, manufacturing control, labor cost regulator, excellence control and so on. Conversely, control over the price is implemented through the methods of financial control and typical costing (Meigs, 1998). The control methods aid the management in understanding the operating competence of a firm. Cost accounting also determines the selling price. The intention of all business firms is minimizing costs and maximizing profits. The costs incurred in producing goods and services may be reduced through incorporating alternate but cheaper resources of
Garrison, R. H., Noreen, E. W., & Brewer, P. c. (2010). Managerial Accounting. New York: McGraw Hill/Irwin.
A “Fixed cost” can be defined as “a cost that does not change with an increase or decrease in the amount of goods or services produced or sold”. It is time related.
Total cost is all of the expenses incurred in the production of a product, to include fixed and variable costs. Fixed costs, are expenses that are constant and do not change from month to month regardless of the amount of products sold. For instance, the rent of the factory is considered a fixed cost, for the reason that, the rent must be paid whether products are produced and sold or not. Variable costs,
Kinney, Michael R., and Cecily A. Raiborn. 2013. Cost Accounting: Foundations and Evolutions, 9th Edition. Cengage Learning.