Managerial Accounting Practices - Essay Example

I analyzed your idea about converting variable to fixed costs. This decision must be studied carefully before making a decision. That being said my opinion is that it is a good idea. Fixed costs are represents a constant costs that must be paid every month. For example the rent on the building is always a fixed $5000. There is no way to eliminate that costs, only by moving or renegotiating the terms of the lease can that fixed costs change in some way. The main problems with fixed costs is that if sales levels go down a company and fixed are high it is very probably the company will incurred in operating losses.

Another disadvantage of fixed costs is that they eliminate flexibility and make the job of managerial accountants much harder. Variable costs change depending on the level of sales. Also a managerial accountant can find ways to eliminate or reduce variable costs easier than fixed costs. A costs structure in which variable costs are more influential than fixed costs is more likely to have a lower breakeven point. The breakeven point is the amount of sales necessary to cover all expenses. There are many fixed costs in which Claire Corporation is incurring.

Some of the company’s fixed costs include building rent, salaries of administration staff, and depreciation of equipment expenses. The company’s plan of expanding the amount of distribution centers is a move that will definitely increase the company’s fixed costs. The overall sales have to increase to justify that strategic choice. If variable costs are reduce it would increase the contribution margin of the company and raise its profitability. The situation of having to liquate merchandise due to excess inventory must be remedied immediately.

If the company adjust its cost structure geared towards variable costs instead of fixed costs the plan of creating a just in inventory system would bring greater benefits for the company. There are ways for the company to begin the transformation process to moving away form unnecessary fixed costs. A fixed I had not mentions that is major problem in the company is maintenance costs of the equipment. Some of these machines are obsolete and should be replaced immediately. Buying new machine would eliminate most of the wastage and unnecessary maintenance costs.

I also evaluated the company debt situation. The firm has multiple long term loans that were incurred when the firm’s credit score was low due to company being a newcomer in the industry. Now our business credit rating has gone up a lot. Refinancing these debts to be replaced with new issues of debt at lower interest rates would reduce the company’s fixed interest expense. To summarize my discussion on the topic you brought up of converting variable to fixed costs. My position is that the company should perform a study to determine if the plan is viable and how to implement the measures if adjustment towards changing the cost structure is approved.

References12image.com (2009). Break-Even Point. Retrieved March 1, 2009 from http://www.12manage.com/methods_break-even_point.html