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UP level accounting - Essay Example
Finance & Accounting
Pages 3 (753 words)
When a semi-variable cost is treated as a variable cost for the purpose of variance analysis, the charge of overhead is exceeded. This is because semi-variable costs do not vary with each unit of activity, but change depending upon the level of activity achieved…
When a semi-variable cost is treated as a variable cost for the purpose of variance analysis, the charge of overhead is exceeded. This is because semi-variable costs do not vary with each unit of activity, but change depending upon the level of activity achieved.Therefore, by granting the status of variable costs to semi variable costs, the overheads are hiked and thus profitability is reduced. Similarly, fixed costs remain fixed over a period of time, irrespective of the levels of activity. By assigning the status of fixed costs to semi-variable costs, during times of lowered levels of activity, there is a high overhead charge which significantly erodes profitability.The result of treating a step-fixed costs, for the purpose of variance analysis, as a variable one would be that, if the costs need to be calculated on the shortest time frame, there may not be material variations, but if taken on the long time, the impact of the step fixed costs would not be realized, or in other words, profits may be over stated. For example, the costs of running a single machine for several months would be different from running several machines for a single month. (Blocher et al, 2008) Thus by assigning the nature of variable to a step fixed cost would overstate profits over a period of time.When an operation entails both fixed and variable costs, and if all costs are taken as variable, it would wrongly inflate profits and underestimate costs. ...
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