Understanding of the Different Kinds of Cost: Variable, Fixed, and Mixed - Research Paper Example

?Running Head: COSTS I. Part I This is a memo set out to discuss costs in three fronts. That is, it will have a vivid focus on variable, fixed and mixed costs and these will be handled in the order in which they have been listed. The focus will narrow down and analyze these costs in the context of the EEC journal activity. II. Part II: Cost Analysis a. Variable Costs ‘Variable costs’ is an expression referring to those cost outlays which vary with varied levels of production. In other words these costs will be seen to change in a business scenario once the business varies its production levels. Some of the known examples of variable costs may be with the inclusion of material costs, costs of labor and other business overheads that vary with different production levels. (investorwords.com, 2011) Thus, a variable cost is that cost that varies, in aggregate, with varying activity levels. The term activity can be referred to in different ways. These may include activities like the number of units that a business produces, number of units sold, miles that are driven, print lines, beds occupied, and the number of hours worked among others. Using the example aforementioned of direct materials, then, one can bring the bigger picture of what variable costs are. These direct costs vary in a direct manner to the magnitude of units that have been produced. A direct example may be used here as follows: Take a certain motor vehicle manufacturing company that requires a power battery per vehicle that they produce. If the number of vehicles produced is varied; such that there is a reduction in the number of vehicles produced in a given operation period, then the number of power batteries needed to serve these vehicles will vary proportionately. A decrease in vehicles manufactured by 15% will, therefore, lead to a 15% decrease in the costs of power batteries used. However, it is of essence to note that what is variable in one firm may not be variable in another. Thus, it all depends upon the production structure of the firm in focus. (Garrison, 2011 p48) Examples from the EEC journal may be with the inclusion of supplies factory of 3,500,000, purchase of raw materials of 33.710,000, and direct labor factory of 8,500,000. b. Fixed Costs ‘Fixed costs’, on the other hand, refers to those costs that are related to the production of various inputs that are applied in a given organization, and which (inputs) cannot be varied in response to variances in the aggregate activity or firm’s output. This, however, will depend on a given production range. Fixed costs can as well be referred to as non-variable cost outlays. Thus, these costs remain fixed for a given volume range. They fluctuate beyond the set range of production, therefore. Fixed costs also related to a high extent to time. To this point of time dependence, thus, one can note in that in the long run; fixed costs can be varied. They may as well be viewed in two major sub-headings. These are; discretionary and committed. Discretionary fixed costs are those fixed costs that can be budgeted for by a given organization’s management or marketers. Committed costs, on the other hand, are those costs that a related to the buying of assets associated with capacity production. The major characteristic that can be applied in the identification of committed fixed costs is that of its predetermination and occurrence. These two identification factors of committed costs are alterable only in scenarios of other major decisions to change or reverse the prior commitment. They are also referred to as discretionary or managed costs that emanate from the decisions by the management. They can be reduced or incurred at the management’s discretion. (Khan and Jain, 2003 pp4-12) Examples from the EEC journal entries of fixed cost outlays may include plant and equipment amounting to 80,000,000, land amounting to 1,000,000, and depreciation factory amounting to 1,600,000. c. Mixed Costs Mixed costs are those costs that possess both fixed and variable elements in them. They are also referred to as semi-variable costs. Some of mixed costs may include telephone and electricity bills. A part of these types of business expenses are mostly line rents. Line rents may be fixed per month, but have a variable part like the amounts of calls made or units consumed. The relationship existing between the level of activity and mixed costs can be summarized as follows: Y = a + bX Where; Y= aggregate mixed cost a = aggregate fixed cost b = variable cost outlay per unit produced X = activity level Thus, this makes it very easy to compute the level of mixed costs that are incurred per given activity level. Mixed costs are also dependent upon the given activity level range. In the day-to-day operations of a given business, mixed costs are a common occurrence. Examples of this type of cost are, that costs incurred in an X-ray service. To expound on this, one can view these costs as will be explained below. The aspect of fixed cost outlays is evident under the depreciation of the X-ray equipment as well as the associated salaries for the technicians and radiologists. Variable cost outlays can be seen to emanate from the X-ray films, supplies and power. Costs of machineries maintenance can also be rated as mixed costs. Most firms incur costs such as maintenance facilities renting and in the paying of the skilled mechanics that they have in the payroll. These may be viewed as fixed costs. Variable cost outlays on the other hand can be seen in the same firm in the replacement of the machinery parts, tires, and lubricants among others, dependent on how much the plants and machinery are put under use. Thus, the fixed portion of costs’ portion represents the fundamental cost that ensures that a given service has been made available for utilization. The portion that relates to the variable costs, on the other hand, is that cost portion that for the actual service consumption. Therefore, the variable element differs or varies with the level of the amount of service that is being consumed in a given period of time. (accountingformanagement.com, 2011) From the EEC journal entries one can lift examples of mixed costs like; maintenance expenses of the factory of 8,700,000 and selling expenses of 1,560,000. III. Part III: Effects of Sales Adjustments on Costs a. Affect sales volume increase/decrease has on unit fixed costs ‘Fixed costs’ refers to those costs that are related to the production of various inputs that are applied in a given organization, and which (inputs) cannot be varied in response to variances in the aggregate activity or firm’s output. (Khan and Jain, 2003 pp4-12) Therefore, a variance upwards or downwards on the level of sales will not have any impact on the fixed costs in aggregate. However, note that in this scenario the issue is about unit fixed costs. Therefore, an increase in sales volume will definitely cause a fall in unit fixed costs and a decrease in sales volume will have the affect of a rise in unit fixed costs. b. Affects sales volume increase/decrease has on unit variable costs ‘Variable costs’ is an expression referring to those cost outlays which vary with varied levels of production. In other words these costs will be seen to change in a business scenario once the business varies its production levels. (investorwords.com, 2011) Thus, an increase in the level of sales volume will raise unit variable costs related to it and a decrease will have an affect of reducing variable costs. However, when it comes to unit variable costs, the case may change. An increase in sales volume will lead to no change in unit variable costs (assuming that the unit costs remain constant of the variable units used) and a decrease in sales volume will also not have an impact on the unit variable costs. This is while holding the assumption aforementioned in the parenthetical statement. c. Affects sales volume increase/decrease has on total fixed costs ‘Fixed costs’ refers to those costs that are related to the production of various inputs that are applied in a given organization, and which (inputs) cannot be varied in response to variances in the aggregate activity or firm’s output. (Khan and Jain, 2003 pp4-12) Therefore, a variance upwards or downwards on the level of sales will not have any impact on the fixed costs in aggregate. d. Affects sales volume increase/ decrease has on total variable costs ‘Variable costs’ is an expression referring to those cost outlays which vary with varied levels of production. In other words these costs will be seen to change in a business scenario once the business varies its production levels. (investorwords.com, 2011) Thus, an increase in the level of sales volume will raise unit variable costs related to it and a decrease will have an affect of reducing variable costs. IV. Conclusion The conclusion from this study is that; variable costs will be seen to change in a business scenario once the business varies its production levels, fixed costs cannot be varied in response to variances in the aggregate activity or firm’s output and mixed costs are those costs that possess both fixed and variable elements in them. They are also referred to as semi-variable costs. However, it is good to note that as explained in part III, the scenario may change when it comes to unit costs. References: accountingformanagement.com. (2011). Mixed Cost or Semi-variable Cost. Retrieved 29 November 2011 http://www.accountingformanagement.com/mixed_costs.htm Garrison. (2011). Managerial Accounting 11E W/Dvd. Tata McGraw-Hill Education. p48. investorwords.com. (2011). Variable Cost. Retrieved 29 November 2011 http://www.investorwords.com/5221/variable_cost.html Khan & Jain. (2003). Cost Accounting. Tata McGraw-Hill Education. pp4-12. Read More