...between fixed costs, semi-fixed costs, and variable cost Anyone who runs a business knows that some cost must be paid no matter how many products are offered for sale. For example, if I own a Jeans Pants store, I must pay my property taxes whether I sell 20 or 200 pairs of pants each day. Mortgage payments must be made to the bank no matter what my activity is. These and other payments must be made regardless of sales. Expanses that must be paid no matter how many goods or services are offered for sale are called fixed costs. Other types of costs change with the number of products offered for sale. These are called variable costs. Variable costs include the wages of employees, raw materials, electric power, and the cost of maintaining inventory. Entrepreneurs need to understand the important differences between fixed and variable costs and how these differences affect a firm’s success. Fixed costs must be paid because they are beyond the control of the entrepreneurs. The only costs an entrepreneurs has immediate control over are variable costs. Semi-fixed costs are costs which only change when there is a large change in output. For example, costs associated with buying a new machine to cope with increase production. A semi-fixed cost moves upwards in a “step” fashion, staying at a certain level over a small range and then moving to the next level quickly. Total costs are made of what components? Total cost is what it cost to operate...
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...Running head: KINDS OF COST Variable, Fixed, and Mixed Costs ACCT614-1003B-05 September 3, 2010 Variable, Fixed, and Mixed Costs I. Introduction As the corporate business financial analyst for SAC, it is essential that I possess a complete comprehension of the various kinds of costs a corporation carries. The three various kinds of costs that are essential for me to comprehend are variable, fixed, and mixed costs. To ensure that I comprehend all three of these costs, I will explain each of them, give examples, and review SAC’s journal entries for 2006 listing the various costs. II. Cost Analysis a. Variable Costs The first kind of cost I will discuss is variable cost. “A variable cost is a cost that varies, in total, in direct proportion to changes in the level of activity” (Garrison, Noreen, & Brewer, 2010, p. 48). Some examples of the activity are hours worked, units manufactured, miles driven, units sold, et cetera. One example of a variable cost is the cost of materials. The cost of the materials will fluctuate depending on how many final products are being manufactured. To help me comprehend this I will give an example, if a corporation needed one computer chip for its production of one final product then if production increased by 20 final products then the cost of the material, computer chip, would go up by 20 units. The below table shows the rise of the variable cost of the computer chip due to the increased number of products being manufactured...
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...of the Westchester Home-Delivered Meals (WHDM) program decides to again recompute fixed costs, variable costs, and the BEP using the high–low method. Here are the number of meals served and the total costs of the program for each of the first six months: Month Meals Served Total Costs July 3,500 $20,500 August 4,000 22,600 September 4,200 23,350 October 4,600 24,500 November 4,700 25,000 December 4,900 26,000 Recompute fixed costs, variable costs, and the BEP. What are the variable costs? What are the fixed costs? How many meals will the WHDM program need to provide during the fiscal year to reach the BEP? How much profit will the program earn if it completes its 45,000-meal contract with the City of Westchester? Costs high-low $26,000- $20,500 = $5,500 Meals high-low 4,900- 3,500 = 1,400 Variable cost per meal $5,500 ÷ 1,400 = $3.93 Variable cost for the low month $13,755 ( 3,500x $3.93) Fixed costs $6,745 ($20,500-$13,755) 3,665.76 meals per month × 12 months = 43,989...
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...Budgets & Break-even analysis. P6 Illustrate the use of budgets as a means of exercising financial control of a selected company Fixed Costs- The running costs of a business such as rent and wages. Variable Costs- Costs that varies with the level of output or sales.An example of a variable cost would be direct labor costs. The breakeven point to two decimal places is 6.12 (£68) | Fixed Cost | Variable Costs | Total | Revenue | Profit/Loss | 0 | 416 | 0 | 416 | 0 | -416 | 1 | 416 | 12 | 428 | 80 | -348 | 2 | 416 | 24 | 440 | 160 | -280 | 3 | 416 | 36 | 452 | 240 | -212 | 4 | 416 | 48 | 464 | 320 | -144 | 5 | 416 | 60 | 476 | 400 | -76 | 6 | 416 | 72 | 488 | 480 | -8 | 7 | 416 | 84 | 500 | 560 | 60 | 8 | 416 | 96 | 512 | 640 | 128 | 9 | 416 | 108 | 524 | 720 | 196 | 10 | 416 | 120 | 536 | 800 | 264 | Three ways in which the Hotel Excellent can attract more customers for 2011 and reasons why the method would be effective: 1) Cut down on the variable and fixed costs. The hotel’s costs have risen which has resulted in more loss than profit, therefore if the hotel lower their costs there may be more room for profit. The hotel could get their supplies from cheaper suppliers, could switch companies for their electricity, gas, water and lay off staff if a high volume of staff is not essential. 2) To increase sales the Hotel Excellent could advertise and promote themselves more; this will bring publicity and attention to the hotel. Advertising...
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...turbine engines, which increase fuel economy. The variable cost is $ 1.4 million per unit, and the credit price is $ 1.65 million each. Credit is extended for one period, and based on historical experience, payment for about 1 out of every 200 such orders is never collected. The required return is 2.5 per cent per period. Q1) Assuming that this is a one time order, should it be filled? The customer will not buy if credit is not extended? Q2) What is the break-even probability of default in port (a)? Q3) Suppose that customer’s who do not default become repeat customers and place the same order every period forever. Further assume that repeat customers never default. Should the order be filled? What is the break even probability of default? Q4) Describe in general terms why credit terms will be more liberal when repeat orders are a possibility. CASE STUDY : 2 Taper Corporation shows the following information on its 2007 income statement. Sales = Rs 1,62,000/-; Cost = Rs 93,000/-; Other Expenses = Rs 5,100/-; Depreciation Exp = Rs 8,400/-; Interest Expenses = Rs 16,500/-; Taxes = Rs 14,820/-; Dividends = Rs 9,400/-. In addition you are told that the firm issued Rs 7,350/- in new equity during 2007 and redeemed Rs 6,400/- in outstanding long term debt. Q1) What is the 2007 operating cash flow? Q2) What is the 2007 cash flow to creditors? Q3) What is the 2007 cash flow to stockholders? Q4) If net fixed assets increased by Rs 12,000/- during the year...
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...Chapter 5 Cost Behavior : Analysis and Use Group Member: Jayanti Suli F12218004 Juan Hanam F12218005 Ricwilson Horax F12218006 Richard Hendrawan F12418022 Types of Cost Behavior Patterns Cost Structure is the relative proportion of fixed, variable and mixed costs found within an organization 1. Variable Costs An activity base (also called a cost driver) is a measure of what causes the incurrence of variable costs. As the level of the activity base increases, the total variable cost increases proportionally. Units produced (or sold) are not the only activity base within companies. A cost can be considered variable if it varies with activity bases such as miles driven, machine hours, or labor hours. True variable costs As an example of an activity base, consider your total long distance telephone bill. The activity base is the number of minutes that you talk. A true variable cost is one whose total dollar amount varies in direct proportion to changes in the level of activity. On your land-line, your total long distance telephone bill is determined by the number of minutes you talk. An activity base, or cost driver, is a measure of what causes the incurrence of variable costs. As the level of activity base increases, the variable cost increases proportionally. Variable Cost per Unit A variable cost remains constant if expressed on a per unit basis. The cost per minute talked is constant. For example, 10 cents per minute. Example of variable cost 1. Merchandising...
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...Chapter 02 Cost Behavior, Operating Leverage, and Profitability Analysis Multiple Choice Questions 1. | Java Joe operates a chain of coffee shops. The company pays rent of $20,000 per year for each shop. Supplies (napkins, bags and condiments) are purchased as needed. The manager of each shop is paid a salary of $3,000 per month, and all other employees are paid on an hourly basis. Relative to the number of customers for a shop, the cost of supplies is which kind of cost? A. | Fixed cost | B. | Variable cost | C. | Mixed cost | D. | Relevant cost | | 2. | Select the correct statement regarding fixed costs. A. | Because they do not change, fixed costs should be ignored in decision making. | B. | The fixed cost per unit decreases when volume increases. | C. | The fixed cost per unit increases when volume increases. | D. | The fixed cost per unit does not change when volume decreases. | | 3. | Larry's Lawn Care incurs significant gasoline costs. This cost would be classified as a variable cost if the total gasoline cost: A. | varies inversely with the number of hours the lawn equipment is operated. | B. | is not affected by the number of hours the lawn equipment is operated. | C. | increases in direct proportion to the number of hours the lawn equipment is operated. | D. | None of these | | 4. | Select the correct statement regarding fixed costs. A. | There is a contradiction between the term...
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...materials Direct Labor Variable manufacturing overhead Variable manufacturing cost per unit Variable manufacturing cost per unit Number of units produced Total variable manufacturing cost Fixed manufacturing overhead per unit Number of units produced Total fixed manufacturing cost Total product (manufacturing) cost $ $ $ $ $ 6.00 3.50 1.50 11.00 11.00 10,000 $ 110,000.00 4.00 10,000 $ 40,000.00 $ 150,000.00 $ 2. Sales commission Variable administrative expense Variable selling and administrative per unit Varible selling and admin. Per unit Number of units sold Total variable selling and admin. Expense Fixed selling and administrative expense per unit ($3 fixed selling + $2 fixed admin) Number of units sold Total fixed selling and administrative expense Total period (nonmanufacturing) cost $ $ $ $ 1.00 0.50 1.50 1.50 10,000 $ 15,000.00 $ 5.00 10,000 $ 50,000.00 $ 65,000.00 3. Direct materials Direct labor Variable manufacturing overhead Sales commissions Variable administrative expense Variable cost per unit sold Direct materials Direct Labor Variable manufacturing overhead Sales commissions Variable administrative expense Variable cost per unit sold $ $ $ $ $ $ $ $ $ $ $ $ 6.00 3.50 1.50 1.00 0.50 12.50 6.00 3.50 1.50 1.00 0.50 12.50 4. 5. Variable cost per unit sold Number of units sold Total variable costs Variable cost per unit sold Number of units sold Total variable costs Total fixed manufacturing cost Number of units produced...
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...Variable Costing and Segment Reporting: Tools for Management Chapter 6 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education 6-2 Learning Objective 1 Explain how variable costing differs from absorption costing and compute unit product costs under each method. 6-3 Overview of Variable and Absorption Costing Variable Costing Absorption Costing Direct Materials Product Costs Direct Labor Variable Manufacturing Overhead Product Costs Fixed Manufacturing Overhead Period Costs Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses Period Costs 6-4 Quick Check Which method will produce the highest values for work in process and finished goods inventories? a. Absorption costing. b. Variable costing. c. They produce the same values for these inventories. d. It depends… 6-5 Quick Check Which method will produce the highest values for work in process and finished goods inventories? a. Absorption costing. b. Variable costing. c. They produce the same values for these inventories. d. It depends. . . 6-6 Unit Cost Computations Harvey Company produces a single product with the following information available: ...
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...Chapter 7 Variable Costing: A Tool for Management Solutions to Questions 7-1 Absorption and variable costing differ in how they handle fixed manufacturing overhead. Under absorption costing, fixed manufacturing overhead is treated as a product cost and hence is an asset until products are sold. Under variable costing, fixed manufacturing overhead is treated as a period cost and is expensed on the current period’s income statement. 7-2 Selling and administrative expenses are treated as period costs under both variable costing and absorption costing. 7-3 Under absorption costing, fixed manufacturing overhead costs are included in product costs, along with direct materials, direct labor, and variable manufacturing overhead. If some of the units are not sold by the end of the period, then they are carried into the next period as inventory. When the units are finally sold, the fixed manufacturing overhead cost that has been carried over with the units is included as part of that period’s cost of goods sold. 7-4 Absorption costing advocates argue that absorption costing does a better job of matching costs with revenues than variable costing. They argue that all manufacturing costs must be assigned to products to properly match the costs of producing units of product with the revenues from the units when they are sold. They believe that no distinction should be made between variable and fixed manufacturing costs for the purposes of matching costs and revenues. ...
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...Computation Var. cost per unit: Units sold: 410000 Price per unit: $68 $60 Fixed costs: $1,640,000 Revenue = Revenue = Total Variable Cost = Total Va 1. a. Contribution margin Contribution Margin = Total Revenues - Total Variable Costs Contribution Margin = $27,880,000 - $24,600,000 Contribution Margin = $3,280,000 b. Operating Income Operating Income = Total Revenue -Total Var. Costs - Fixed Costs Total Revenue Total Variable Cost Fixed Costs Operating Income 2. Effect of New Equipment Units sold: Price per unit: Var. cost per unit: Fixed costs: 410000 $68 $54 $5,330,000 Revenue = Revenue = Total Variable Cost = Total Va New Contribution Margin= $5,740,000 New Operating Income = $410,000 3. Garret should not accept the proposal because operating income will decrease by $1,230,000. This is becaus in 20. CVP Exercises Units Sold: Cost per Unit: Var. Cost per Unit: Fixed Costs: 1. a. Total Revenue Total Variable Costs Fixed Costs 5000000 $0.50 $0.30 $900,000 $2,500,000 $1,500,000 $900,000 Operating Income $100,000 b. Breakeven Point in Revenues Breakeven Revenues = Fixed Costs ÷ Contribution Margin % Breakeven Revenues= $900,000 ÷ 40% Breakeven Revenues = $2,250,000 2. .04 per unit increase in variable cost Units Sold: 5000000 Cost per Unit: $0.50 Var. Cost per Unit: $0.34 Fixed Costs: $900,000 Total Revenue Total Variable Costs Fixed Costs Operating Income $2,500,000 $1,700,000 $900,000 -$100,000 3. 10% increase in fixed costs and units sold...
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...Costing and Cost Volume Profit Analysis Meaning Marginal Cost: The tenn Marginal Cost refers to the amount at any given volume of output by which the aggregate costs are charged if the volume of output is changed by one unit. Accordingly, it means that the added or additional cost of an extra unit of output. Marginal cost may also be defined as the "cost of producing one additional unit of product." Thus, the concept marginal cost indicates wherever there is a change in the volume of output, certainly there will be some change in the total cost. It is concerned with the changes in variable costs. Fixed cost is treated as a period cost and is transferred to Profit and Loss Account. Marginal Costing: Marginal Costing may be defined as "the ascertainment by differentiating between fixed cost and variable cost, of marginal cost and of the effect on profit of changes in volume or type of output." With marginal costing procedure costs are separated into fixed and variable cost. According to J. Batty, Marginal costing is "a technique of cost accounting pays special attention to the behaviour of costs with changes in the volume of output." This definition lays emphasis on the ascertainment of marginal costs and also the effect of changes in volume or type of output on the company's profit. FEATURES OF MARGINAL COSTING (1) All elements of costs are classified into fixed and variable costs. Marginal costing is a technique of cost control and decision making. Variable costs are charged...
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...------------------------------------------------- COST BEHAVIOR and COST ESTIMATION ------------------------------------------------- LEARNING UNIT OBJECTIVES After studying Unit 2.1, you should be able to: * Identify basic cost behavior patterns and explain how changes in activity level affect total cost and unit cost. After studying Unit 2.2, you should be able to: * Estimate a cost equation from a set of cost data and predict future total cost from that equation. After studying Unit 2.3, you should be able to: * Prepare a contribution format income statement. ------------------------------------------------- PREVIEW OF CHAPTER 2 While GAAP-based income statements are required for external financial reporting, they are not very useful for internal decision making because expenses are categorized based on business function. Unit 2.1 explains why it is important for managers to understand cost behavior and how various types of costs behave. Unit 2.2 explains cost estimation and the methods of estimating costs. Unit 3 explains the contribution margin, contribution margin ratio, the contribution margin income statement, and how changes in costs affect operating income. The content and organization of this chapter are as follows: Cost Behavior and Cost Estimation | Unit 1 – Cost Behavior Patterns | Unit 2 – Cost Estimation | Unit 3 – Contribution Margin Analysis | * Variable costs * Fixed costs * Discretionary versus committed fixed costs * Step...
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...COST BEHAVIOR: To get a better handle on cost behavior, what are some specific examples of variable, fixed, and mixed (semi-fixed) costs in our own personal lives. Great discussion and great examples! A great example how one thing can be variable, fixed, or semi-fixed depending on the choice of plan: My cell phone bill is an example of a fixed cost. The bill is always the same because usage always falls within the relevant range. The cost is predictable. An example of a variable cost rate would be a pay-as-you-go phone card where you pay for minutes in increments. No matter how many minutes I talk on my phone the bill remains the same. If I used a pay-as-you-go phone, the cost for each 100 minutes may be the same but my total cost would vary based on the amount of 100 minute increments I purchased. A semi-fixed cost would be a data plan on a cell phone where the price is fixed up to a point and then you pay incrementally for data blocks that are over your plan limit. To go a step farther, you can consider how your personal costs and income match up. Are most of your costs and income fixed? Then planning is easy. If you have fixed income, but many variable costs, watching those costs is crucial. Dealing with variable income, and a high proportion of fixed costs can also be challenging. A few points to remember: 1) In the long run, all costs can be variable (do we build that building?, do we hire that salaried employee?, do we rent that space?, etc.) 2) Don’t confuse the payment...
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...with a particular cost. 2. A variable cost remains constant per unit at various levels of activity. 3. A fixed cost remains constant in total and on a per unit basis at various levels of activity. 4. If volume increases, all costs will increase. 5. If the activity index decreases, total variable costs will decrease proportionately. 6. Changes in the level of activity will cause unit variable and unit fixed costs to change in opposite directions. 7. For CVP analysis, both variable and fixed costs are assumed to have a linear relationship within the relevant range of activity. 8. The relevant range of activity is the activity level where the firm will earn income. 9. Costs will not change in total within the relevant range of activity. 10. The high-low method is used in classifying a mixed cost into its variable and fixed elements. 11. A mixed cost has both selling and administrative cost elements. 12. The fixed cost element of a mixed cost is the cost of having a service available. 13. For planning purposes, mixed costs are generally grouped with fixed costs. 14. The difference between the costs at the high and low levels of activity represents the fixed cost element of a mixed cost. 15. When applying the high-low method, the variable cost element of a mixed cost is calculated before the fixed cost element. ...
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