Free

# Fixed and Variable Costs - Essay Example

Summary
1. Fixed cost is that cost that does not change significantly with the change in the level of activity. Examples of fixed cost include interest expense, salaries and expenses of the employees or executives, property taxes and insurance protection.
Variable cost is that cost that cost which changes with the change in the level of activity…

## Extract of sample "Fixed and Variable Costs"

Week 3 DQ's Fixed cost is that cost that does not change significantly with the change in the level of activity. Examples of fixed cost include interest expense, salaries and expenses of the employees or executives, property taxes and insurance protection.
Variable cost is that cost that cost which changes with the change in the level of activity. For example if the company is producing more aero planes then more amount of raw material will be required to make the planes (Leslie 1993). Examples of variable cost include raw material, labor cost.
There are some costs which include both the fixed and variable element in it and are referred to as semi variable costs. Examples of semi variable costs include electricity expense, telephone expense. In one broad category of Over head expenses, these costs are collectively shown for example depreciation of machinery as well as the heating and lighting cost. Electricity cost is a semi-variable cost because there is a fixed charge and then on any unit we use we are charged an additional amount. So this additional amount is the variable cost and the fixed charge is the fixed cost. Semi variable cost stays constant for a certain time period and then it goes to a higher cost at a specific increased volume (Leslie 1993).
For analysis purpose, the fixed part is separated from the variable part and both are written separately so that proper analysis can be done and so the company should know as to how much is their fixed cost and how much is variable.

2. A company's break-even point is its sales volume at which its total costs equal its total revenues. This means that at the break-even point, the company is making neither any profit nor any loss. If a company is operating below its break-even point it would not be able to exist in the long run as its costs (fixed and variable) would not be covered by the revenues (Susan 2008) . If the company is operating above the breakeven point, then it will be earning profits and at least be able to cover its fixed and variable cost. Break-even point can be calculated using the following formula:
Break-even sales (units) = (Fixed cost + Target operating income)/Unit contribution margin
Break-even sales (Dollars) = (Fixed cost + Target operating income)/contribution margin ratio
Unit contribution margin = Unit sales price - Variable cost per unit
Contribution margin ratio = (Unit sales price - Variable cost per unit)/Unit sales price
With this calculation, a company can better be able to make decisions about how much do they need to sell to at least cover their fixed and variable cost. Contribution margin is that amount of money which contributes to the fixed cost and its profits after deducting the variable cost (Susan 2008). In break-even calculation, if the cost (variable) of a product for example increases, then the unit contribution margin will decrease and therefore according to the formula, the breakeven sales in units as well as in dollars will increase. And the opposite can happen if the cost of the product decreases. (In this example we are making the assumption that the cost is changing but not the selling price).

Works Cited

Leslie Chadwick (1993) Management Accounting. Routledge

Susan Ward (2008) Break Even Analysis. Retrieved March 12, 2008, from Break Even Analysis-Fixed Costs Variable Costs Website: http://sbinfocanada.about.com/cs/startup/g/breakevenanal.htm Read More
Cite this document
• APA
• MLA
• CHICAGO
(“Fixed and Variable Costs Essay Example | Topics and Well Written Essays - 500 words”, n.d.)
(Fixed and Variable Costs Essay Example | Topics and Well Written Essays - 500 Words)
https://studentshare.org/miscellaneous/1515187-fixed-and-variable-costs.
“Fixed and Variable Costs Essay Example | Topics and Well Written Essays - 500 Words”, n.d. https://studentshare.org/miscellaneous/1515187-fixed-and-variable-costs.
Click to create a comment or rate a document

## CHECK THESE SAMPLES OF Fixed and Variable Costs

### Allocation of Fixed Costs

...? Allocation of Fixed Costs Allocation of Fixed Costs Process of Allocation of IT costs In recent technological environment,the use of information technology has captured a major area in all fields of life. People are adopting up to date IT techniques for maintain their business in efficient manner. All small, medium and large companies run their business function with the help of information technology rather than using traditional techniques. From the perspective of cost accounting, all the indirect costs and overheads were absorbed in direct costs using absorption costing methodology in traditional costing system. But in recent environment where the overheads such as IT cost became a major portion in product cost. In advanced... ...
3 Pages(750 words)Essay

### Fixed Cost, Variable Costs, and BreakEven Point (Financial Management)

...10 Variable Cost a. Difference in Service Volume 4, 900 - 3,500 400 b. Difference in Cost \$26,000 - \$20, 500 = \$5, 500 c. Variable Cost per Meal \$5, 500 / 1400 = \$ 3.93 per meal Fixed Cost (from July data) 3, 500 * \$3.93 = \$13, 755 \$20, 500 - \$13, 755 = \$6, 745 BEP PX = A + BX \$5.77 X = \$6, 745 + \$3.93 X \$5.77 X - \$3.93 X = \$6, 745 \$1.84 X = \$6, 745 X = 3, 666 BEP = 12 X = 43, 992 At 45, 000 meals, profit will be: \$5.77 (45, 000) - \$3.93 (45, 000) - \$6, 745 \$ 82, 800 - \$ 6, 745 = \$76, 055 Exercise 10.2 Subscribers = 525 Fixed Costs a. Newsletter Coordinator =...
2 Pages(500 words)Essay

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

...Fixed and variable costs: The total overhead expense of a company comprises mainly of two components. They are the fixed and the variable components.The fixed components of the expense are the ones which remains fixed at all levels of the production. 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. On the other hand, the variable components of the expense, in...
2 Pages(500 words)Research Paper

### Variable and Fixed Costs

...Variable and Fixed Costs Part I Financial accounting mainly focuses on financial ments that distributed to financial analysis, lenders, stakeholders and others that are outside the company. On the other hand, financial accounting courses covers general principles of accounting that are generally acceptable. These are principles that must be followed in reporting a corporations’ past transaction results on its income statement, balance sheet, cash flows’ statement, and statements showing changes in the equity of shareholders. On the other hand, managerial accounting focuses on providing information that is essential and is found within the company so that the management of the company can use that information to effectively operate... ...

### Variable and Fixed Costs

...Contribution Margin Income ment Following is the contribution income ment of Herrested Company for the year ending December 31, In this income statement, all the variable costs are first deducted from total sales to get a contribution margin figure. After that, all the fixed expenses are then deducted from contribution margin figure to reach at the net income figure. In year 2011, Herrested Company earned contribution margin of \$60 per unit or \$480,000 in total with the net income of \$180,000. Herrested Company Contribution Margin Income Statement For the period ending December 31, 2011           per unit No. of units sold Total Sales 250 8,000 2,000,000 Variable...
2 Pages(500 words)Essay

### Variable and Fixed Costs

...Running head: VARIABLE AND FIXED COSTS Variable and Fixed Costs (Course Name) 29th November 2012 Variable and Fixed Costs Absorption 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...
2 Pages(500 words)Essay

### Allocating Fixed Costs

...Finance & Accounting Finance & Accounting Part I Costing systems help in ascertaining the cost of product with reference to the revenue that it generates. Usually there are two costing systems that are used to determine the product cost – Traditional costing and Activity based costing. Traditional costing system witnesses companies allocating their production costs only on the basis of the quantity of the production. The basic assumption is that volume of the goods produced is the only driver of the manufacturing costs. Contrastingly, Under the Activity based costing...
3 Pages(750 words)Essay

### CASE 3- Variable and Fixed Costs

...Variable and Fixed Costs The paper below approaches to explain the differences between variable and fixed costs. It also evaluates and explains the different approaches (absorption costing approach and variable costing approach) of making income statements under cost and management accounting concepts. And what is the use of each of the explained approaches. Further the concept of breakeven points is explained, the method to come to the breakeven point is also explained and the purpose of calculating breakeven point is discussed in the following...
3 Pages(750 words)Essay

### Analyze the companys cost structure (e.g., variable vs. fixed costs, manufacturing vs. non-manufacturing costs, direct vs. indirect costs, job costing or process costing, etc) for starbucks

...Starbuck’s Cost Structure Starbuck Company focuses on the production of coffee drinks in major s. During its production the company incurs several costs related to production, distribution and marketing. Variable and Fixed Costs: Variable costs are cost that the company incurs in the entire production process. They include cost of raw materials (coffee beans, plastic cups) and labor costs (e.g. barista salaries). These costs can easily be controlled by the company. For example if the company decided to caffeinate consumers less, they can make latte with...
2 Pages(500 words)Essay

### Modeling and guided practice in a literacy lesson

3 Pages(750 words)Research Paper
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.

## Let us find you another Essay on topic Fixed and Variable Costs for FREE!

This Website is owned and operated by Studentshare Ltd (HE364715) , having its registered office at Aglantzias , 21, COMPLEX 21B, Floor 2, Flat/Office 1, Aglantzia , Cyprus.
• FAQ
• Blog
• New Essays
• Essays
• Miscellaneous