Do Variables Costs and Fixed Costs Differ - Coursework Example

Financial Analysis for Managers I How do variables costs and fixed costs differ Give an example Variable costs are those costs that change with the changes in the quantity produced. On the other hand fixed costs are those costs that do not change (in the short run) regardless of increases or decreases in the level of production. These costs will still be incurred if there is no productivity. (SMBTN, 97-07) In the production of a pencil, the cost of wood used in each pencil would be regarded as a variable cost. If 1 pencil requires 2 grams of wood costing 10 cents, making of 2 pencils will require 4 grams of wood costing 20 cents. Thus with an increase in production, the costs go up. The rent of a warehouse where these pencils are stored is $100; hence it is a fixed cost. $100 would still need to be paid whether 10 pencils are stored there or 1000 pencils. Thus with a change in production, the fixed costs remain unmoved. 2. Analyze your personal expenses on a variable and fixed basis. What are some of your personal fixed costs and variable cost What would cause them to change Variable Cost Lunch at University $5 per day Petrol Costs $4 per day Fixed Cost Bus $300 per quarter School Fee $500 per month Lunch at university would change from a variable cost to fixed cost if the university started providing food to each student and charge that amount in the semester fee. Bus fee would change from a fixed cost to a variable cost if I start taking public bus to school and paying for each day I take that bus. 3. What is a C-V-P analysis used for in the process of using C-V-P analyses, what does it mean to "break even" Cost-Volume-Profit (CVP) analysis is a managerial accounting tool that helps to identify a relationship between the cost, profit and sales volume. It is used to 1) determine the level of output required to achieve any target profit level or 2) to find the impact changes in costs to the profitability. (Mowen & Hansen, 2005) In CVP analysis, 'break even' means to produce goods at such a quantity where there is no-profit and no-loss. It is a position where the company incurs exactly the same amount that it generates from the sales. (Mowen & Hansen, 2005) 4. What is the difference between a direct cost and an indirect cost Give an example of each in the context of teaching an accounting class at your school. A direct cost is that cost that can be directly attributable to a specific unit of product or with a specific operation relating to production. On the other hand, an indirect cost is a fixed or overhead cost that does not relate to the production of a particular item and is incurred even when there is no output. (PHB, 2005) The core activity of an accounting teaching class is to educate the students. Therefore all those items that directly relate to the educational process of accounting would be direct costs and those that do not relate to the educational process of accounting would be treated as indirect costs. The salary paid to the accounting teacher and the costs of accounting books will be direct costs since they directly relate to the teaching of the accounting course. The costs of lighting, electricity, janitorial services, etc. would be indirect costs since they just aid in the teaching process but are not directly related to teaching the course. 5. How can out-of-pocket costs and opportunity costs be applied to your personal financial decisions Out of pocket costs and opportunity costs can be applied to an individual's personal financial decisions by comparing both of these costs. If the benefit of playing an hour of football is more that the benefit of studying for an hour, then the individual should use that hour to play football. If one hour is being spent each day at a tuition center which costs $50/hour for a 4 day week, it would cost $800 for a month using up 16 hours. If these 16 hours are used for other work like taking a horse riding lesson which is $400/month, then financially taking horse riding lessons is a better decision. However the benefit of studying would lead to a job paying $1000 in the future, while the benefit of horse-riding would lead to a job worth $500 in the future. The better decision from this aspect looks to be studying now rather than horse riding. However, the final decision is based on subjectivity and the perceived cost of doing one thing and not the other. 6. Which of the following is an example of a variable cost a. Insurance premium for fire insurance on the factory building b. The salary of the company president c. Wood used to make custom tables (answer) d. rent for use of a storage warehouse e. Depreciation on the factory building 7. Which one of the following statement best explain why companies want to distinguish between direct and indirect costs a. To evaluate business segments on the basis of only those costs directly traceable to each segment (answer) b. To better determine whether a company is a large organization or a small organization. c. To determine the sales prices necessary to break even d. To better distinguish between variables and fixed costs for each product e. To better distinguish between materials cost and labor costs 8. Which one of the following is an example of an opportunity cost a. Revenue lost from sale of cakes by deciding to sell only cookies (answer) b. wages paid to construction workers c. Material used to assemble computers d. Ordering costs related to a customer's special order of guitar strings e. rent paid for the use of a factory building 9. The following are cost associated with manufacturing firms, merchandising firms, or service firms: Classify the costs as (1) product or period; (2) Variable or fixed; and (3) for those that are product costs, as direct materials, direct labor, or manufacturing overhead. Write "not applicable (N/A)" if a category doesn't apply. a. Misc. materials used in production - product - manufacturing overhead; variable b. Salesperson's commission in a real estate firm - product - direct labor; variable c. Administrators' salaries for s furniture wholesaler- period; fixed d. Administrators' salaries for a furniture manufacturer - product - manufacturing overhead; fixed e. Freight costs associated with acquiring inventories for a grocery store - product - direct materials; variable f. Office manager's salary in a doctor's office - period; fixed g. Utilities for the corporate offices of a toy manufacturer - period; fixed h. Line supervisor's salary for a clothing manufacturing firm - product - manufacturing overhead; fixed I. Training seminar for sales staff of a service firm - period; fixed J. Fuel used in a trucking firm - product - manufacturing overhead; fixed k. Paper used at a printing business - product - direct material; variable l. Oil for machinery at a plastics manufacturing firm - product - manufacturing overhead; fixed m. Food used at a restaurant - product - direct material; variable n. Windshields used for a car manufacturer - product - direct material; variable Works Cited 1. Mowen, M. M., & Hansen, D. R. (2005). Management Accounting: The Cornerstone for Business Decisions. South-Western College Pub; 1 edition. 2. PHB. (2005). Glossary of Business Terms . Retrieved January 8, 2008, from Power Home Biz: http://www.powerhomebiz.com/Glossary/glossary-G.htm#I 3. SMBTN. (97-07). Definitions. Retrieved January 8, 2007, from Small Business Dictionary: http://www.smbtn.com/smallbusinessdictionary/ Read More