StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Variable and Fixed Costs - Essay Example

Cite this document
Summary
This implies that the prices of every unit produced by a firm include direct materials, direct labor, as well fixed and variable overheads. Key examples of costs that are…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER93.4% of users find it useful
Variable and Fixed Costs
Read Text Preview

Extract of sample "Variable and Fixed Costs"

Running head: VARIABLE AND FIXED COSTS Variable and Fixed Costs (Course Name)29th November 2012Variable and Fixed CostsAbsorption income statement entails the use of all costs by a manufacturing concern to produce the products. This implies that the prices of every unit produced by a firm include direct materials, direct labor, as well fixed and variable overheads. Key examples of costs that are covered under the absorption income statement include wages to salaries, overheads costs and the raw materials used in the production facility.

On the other hand, variable income statement organizes costs incurred by business by their behavior. Additionally, it indicates the relationship existing between fixed costs and variable costs. Unlike in the absorption costing, all the variable expenses under the contribution income statement are deducted from the sales to get the contribution margin. This is followed by deducting fixed costs from the contribution margin to get the net profit or loss for a particular period.Under the absorption costing and contribution costing the net income is always the same only when the inventory is the same.

Otherwise the income is higher under the absorption income statement that in the contribution income statement when the inventory is higher. Even though the fixed production costs under the contribution income statement are aggregated at the lower part of the income statement, all the variable and the administrative expenses are taken into consideration during the computation of the net profit thus making the two methods to have similar net profits when the income is the same. However, the similarity ends when a firm increases its inventory.

Companies should create another income statement in a different format in order to undertake a comparison. Based on the impact of the inventory on the income of a company, an extra income statement helps the financial managers to show actual income of the company. One of the major aspects that are depicted by the preparation of income statement using the contribution margin format is that it helps the management in determining the proportion of the expenses that has impact on the revenues of a company.

In this regard, it helps the management on adopting ways of minimizing such expenses in order to increase the profits. It is vital to note that fixed costs in the manufacturing of any product must be incurred. This implies that under the variable costing techniques, management is assisted on how to recover the fixed expenses in order to survive.Break-even analysis is a useful tool especially to the marketers. It entails the sales volume expressed in units that is needed in order to cover the costs incurred by a firm (Dayananda et al, 2002).

For example, a new business venture must come up with a break even analysis in its business plan in order to emulate extensive marketing strategies as a way of selling adequate units to offset the initial costs. One of the major aspects of a break-even analysis is that it depicts the relationship between variable costs, fixed costs and selling prices. Example below indicates the computation of a break-even for ABC Company.Fixed CostsOffice rent $ 120Monthly insurance $ 50Total fixed costs $170Variable costsRaw materials $ 5Labor $ 4Total variable cost $ 9Selling price $10Break even point=Fixed costs/selling price-variable costs (Dayananda et al, 2002).

Break even point=$170/ ($10-$9)Break even point=$170/$1Break even point=170This implies that ABC Company must sell 170 units per month to breakeven.ReferencesDayananda, D., Irons, R., Harrison, S., Herbohn, J and Rowland, P. (2002). Capital Budgeting: Financial appraisal of investment projects. Oxford: Cambridge University Press.

Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Variable and Fixed Costs Essay Example | Topics and Well Written Essays - 500 words - 1”, n.d.)
Variable and Fixed Costs Essay Example | Topics and Well Written Essays - 500 words - 1. Retrieved from https://studentshare.org/mathematics/1609321-variable-and-fixed-costs
(Variable and Fixed Costs Essay Example | Topics and Well Written Essays - 500 Words - 1)
Variable and Fixed Costs Essay Example | Topics and Well Written Essays - 500 Words - 1. https://studentshare.org/mathematics/1609321-variable-and-fixed-costs.
“Variable and Fixed Costs Essay Example | Topics and Well Written Essays - 500 Words - 1”, n.d. https://studentshare.org/mathematics/1609321-variable-and-fixed-costs.
  • Cited: 0 times

CHECK THESE SAMPLES OF Variable and Fixed Costs

Engineering management

This has forced users of desktop computers to incur additional costs while trying to install webcams on their monitors.... The costs incurred in acquiring external webcams or laptops may be high depending on a user's economic and social status.... Extension on Desktop monitors Name Institution Executive Summary Desktop computers have no pre-installed webcams regardless of the fact that they are widely used as communication gadgets....
10 Pages (2500 words) Coursework

Total Costs with Total Output

And the total cost is the sum of Variable and Fixed Costs.... hellip; If fixed costs remain the same in this case for both power producers then firm ABC will have a cost advantage over firm XYZ because of its extremely high 30 billion productivity level.... In other words, firm XYZ will incur greater costs to the high contribution of fixed costs in the production of a per kilowatt-hour.... The paper 'Total costs with Total Output' presents the average cost which is determined after dividing total costs with total output....
1 Pages (250 words) Assignment

Research and discuss the differences between variable and fixed costs and provide examples of both

Such costs, which are called as fixed costs, do not… ry with the change in production level or sales volume such as rent, insurance, dues and subscriptions, equipment leases, payments on loans, depreciation, management salaries, and advertising.... Such costs, which are called as fixed costs, do not vary with the change in production level or sales volume such as rent, insurance, dues and subscriptions, equipment leases, payments on loans, depreciation, management salaries, and advertising....
2 Pages (500 words) Research Paper

Teams in the Process of Repeat Purchases

All important Variable and Fixed Costs have been taken into account to come up with final estimation regarding financials.... Lastly, the team has been able to calculate the cost behind the whole business model and has included all important costs and expenses in order to come up with more realistic figures.... The company has presented the breakdown of the cost of the individual product along with other costs and expenses....
2 Pages (500 words) Essay

The Concept of the Price of a Product

Companies have to take into consideration the Variable and Fixed Costs as well as the overhead of the organization.... Companies have to take into consideration the Variable and Fixed Costs as well as the overhead of the organization.... The price of a product is determined by a variety of factors....
1 Pages (250 words) Essay

Starbucks Cost Structure

ariable and fixed costs: Variable costs are cost that the company incurs in the entire production process.... For example… fixed costs on the other hand, are expenses the company incurs whether they make coffee or not.... fixed costs on the other hand, are expenses the company incurs whether they make coffee or not.... They include cost of raw materials (coffee beans, plastic cups) and labor costs (e.... These costs can easily be controlled by the company....
2 Pages (500 words) Essay

U.S. Government's Bailouts

In the short run companies get a capital injection that can be used to cover operating expenses which includes both Variable and Fixed Costs.... The firm was highly leveraged which led to the high fixed costs associated with debt financing.... The fixed costs of the company increase in the long run if the assistance that is given is in the form of debt financing....
2 Pages (500 words) Research Paper

Hr Strategic Planning: Mod3 DISCUSSION

Present value of benefits-investment cost * 100 = ROITo determine the ROI of the youth initiative opportunity, you will have to analyze initiative benefits and total investing costs in your program putting into consideration both Variable and Fixed Costs (Huselid, 2012).... ost benefits analysisCost-benefit analysis involves the determination of the costs and benefits associated with the establishment of projects of the organization.... In this case, it helps an organization to undertake the projects that have higher benefits as compared to its costs and abandon projects that have higher costs as compared to its benefits (Lengnick-Hall, 2009)....
1 Pages (250 words) Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us