Costs and its types – Fixed, Variable, Marginal and Total – CA, CMA Foundation, CS Executive, and Class 12 Economics. Distinguish between fixed cost and variable cost The amount of money spent by a firm on the production of goods is called cost Costs are classified into fixed, variable marginal, and total
Marginal costing is a costing technique wherein the marginal cost, i.e. variable cost is charged to units of cost, while the fixed cost for the period is completely written off against the contribution.
Marginal costing is a costing technique wherein the marginal cost, i.e. variable cost is charged to units of cost, while the fixed cost for the period is completely written off against the contribution.
This is the case study of the subject Managerial Accounting. It deals with the Break Even point. The analysis is basically on the break -even analysis for the multiple products. We have done the full analysis and the solution is in the presentation.
This is the case study of the subject Managerial Accounting. It deals with the Break Even point. The analysis is basically on the break -even analysis for the multiple products. We have done the full analysis and the solution is in the presentation.
Need 2 sets.So total 2 fresh posts and 4 repliesDescribe the d.docxmigdalialyle
Need 2 sets.So total 2 fresh posts and 4 replies
Describe the differences in behavior of fixed costs, variable costs, semi-variable costs and step costs. Then discuss how break-even analysis and contribution margin can be useful in making business decisions.
Submission Instructions:
Any written explanations should use complete sentences, and appropriate grammar, punctuation, spelling and word usage.
Your initial post should be at 200-300 words, formatted and cited in current APA style with support from at least 2 academic sources. Your initial post is worth 8 points.
You should respond to at least two of your peers by extending, refuting/correcting, or adding additional nuance to their posts. Your reply posts are worth 2 points (1 point per response.)
All replies must be constructive and use literature where possible.
Post by classmate 1
In describing the differences in behavior of fixed costs, variable costs, semi-variable costs and step cost, it is imperative to understand what each are and how they affect expense to an organization. A fixed cost is an expense to a business that does not change by either an increase or decrease in business activity. Some examples of fixed cost are rent or business insurance. These expenses remain constant regardless of business volume. A variable cost on the other hand, increases or decreases based on business activity or volume. Some examples of variable costs are ingredients in a product made. If one has a company that makes plastic cups, then variable expense of plastic or ingredients to make plastic cups increase with volume or business activity. Conversely, the variable expense to produce the product line decreases with less volume or business activity. The sum of fixed costs and variable costs is total costs. The key takeaway here is more production increases variable cost but fixed costs remain constant; but with increased volume in relation to unit cost reduces the fixed cost per unit. For example if fixed costs for an organization is $10,000, when more products are produced the per unit cost reduces the fixed unit cost per unit. This(increased volume) is a good thing.
According to reading of bookkeeping express, “Semi-variable costs consist of both fixed and variable costs. Part of the cost stays consistent (often a base cost) and part fluctuates with business activity. Examples include commission payments and overage charges Step costs are unique as they are a fixed cost that fall within certain threshold based on increased volume or decreased volume. This is an investment decision based on either taking on or not taking on new customers based on increasing expenses. This fixed cost can actually change."
The contribution margin is the sales prices of a product minus the variable cost to produce that product. If we them input this calculation over the units sales price, we get the contribution margin ratio. The break- even analysis determines at which point a company ...
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Costs and its types - Fixed, Variable, Marginal and Total
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Costs and its types
Costs and its types - Fixed, Variable, Marginal and Total
What are costs?
The amount of money spent by a firm on the production or manufacturing of goods or
services is called cost.
If a business sells its items at Cost price, it will not make any profits. As a result, merchants
markup cost pricing to add a profit margin.
Based on the nature of the costs and their relationship with the output, costs can be classified into
4 types -
1. Fixed Cost
2. Variable Cost
3. Total Cost
4. Marginal Cost
Fixed cost (FC)
FC is a type of cost that does not change throughout a specific period. The rent of land is an
example of a fixed cost that a small business owner gives to the landlord. If the owner charges
10,000 square feet of land at INR 500 a square foot for ten years, the rent equals INR 5,00,000
per month for those ten years, regardless of the profits made or losses incurred.
It is crucial to consider that fixed costs are not constant in the long run. Regarding our example,
the rent would stay the same only until the following conditions remain consistent -
1. The business owner continues to occupy the space.
2. The landlord does not increase the rent at the end of the agreement of lease.
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However, both of these conditions are most likely to change during the course of the business.
In a graphical presentation, the fixed cost curve is a straight line parallel to the x-axis (output)
since fixed costs do not change with a change in output. Refer to the diagram below for more
clarity.
Variable cost (VC)
VC, as the name suggests, are such costs that consistently vary over the life of the business.
They are directly proportional to the output. When the output = 0, the variable cost is also equal
to zero. Total Variable Cost (TVC) is the product of the total quantity of output and variable cost
per unit of output.
An example of variable costs is operational expenses that can increase or decrease based on
any business activity. A business may need more variable costs, including wages of staff hired,
electricity, gas or water as levels of output increase. Variable expenses can be minimised, unlike
fixed costs, to leave room for profits.
Knowing and managing variable costs is crucial for a company's growth while adapting to the
changes of a marketplace.
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In a graphical presentation, the VC curve is an upward sloping line as costs keep increasing with
a rise in the level of output. Refer to the diagram below for more clarity.
Distinguish between fixed cost and variable cost
Difference between Fixed and Variable Cost -
Basis Fixed Costs Variable Costs
Meaning
Costs that remain
constant for some time,
regardless of the level
of outputs.
Costs that vary in direct
proportion to the
changes in business
activities.
Dependence
Dependent on fixed
factors.
Dependent on variable
factors.
Cost at Output = 0
FC = n,
‘n’ is the fixed amount
that stays constant.
VC = 0
Longevity
Found only in the long
run.
Found in the long and
short run.
Other names
Overhead costs,
Supplementary costs or
Period costs.
Direct costs, Prime
costs.
Examples
Rent, loan payments,
property taxes,
depreciation.
Costs of goods sold,
wages, commissions.
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Applications of Variable and Fixed Costs
Classifying costs as variable or fixed is important for companies. By doing so, companies can
make a budget and analyse how they can reduce their costs. It is integral to analyse all costs so
companies can make improved, stable and profitable business decisions.
For instance, if a corporation incurs high direct labour costs in manufacturing their products,
they'll look to invest in machinery to automate operations, reducing these high variable costs in
exchange for stable fixed costs. Such decisions require considerations of volume capacity and
volatility as trade-offs occur at different outputs. High volumes with low volatility favour
machine investment, while low volumes and high volatility favour the utilisation of variable
labour costs.
If sales were low, labour costs per unit would remain high. It may be wiser to not invest in
machinery and incur a high fixed charge because the high unit labour costs would remain less
than the overall fixed cost of the machinery.
Therefore, the optimum point of production is where profits get maximised, and costs are
minimal.
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Total cost (TC)
TC is the sum of fixed and variable costs.
A solid understanding of a company's fixed, variable and total costs allows a business to form a
profitable price index for its products or services.
Marginal cost
The marginal cost is the incremental cost of producing each additional unit of production.
For example, a coffee shop makes 100 cups of coffee every day. The cost of each cup of coffee
is INR 20. If the coffee shop increases its production to 101 cups of coffee, the one additional
cup of coffee may cost INR 25. Therefore, the INR 25 is the marginal cost in this case.
The term "marginal cost" takes into account both fixed and variable costs. FCs are only
calculated in marginal costs if they are necessary to expand output. VCs, on the other hand, are
always included in marginal cost.