Understanding of the Different Kinds of Cost: Variable, Fixed, and Mixed - Research Paper Example

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Understanding of the Different Kinds of Cost: Variable, Fixed, and Mixed

Understanding of the Different Kinds of Cost: Variable, Fixed, and Mixed

This is a memo set out to discuss costs in three fronts. That is, it will have a vivid focus on variable, fixed and mixed costs and these will be handled in the order in which they have been listed. Some of the known examples of variable costs may be with the inclusion of material costs, costs of labor and other business overheads that vary with different production levels. (investorwords.com, 2011) Thus, a variable cost is that cost that varies, in aggregate, with varying activity levels. The term activity can be referred to in different ways. These may include activities like the number of units that a business produces, number of units sold, miles that are driven, print lines, beds occupied, and the number of hours worked among others. Using the example aforementioned of direct materials, then, one can bring the bigger picture of what variable costs are. These direct costs vary in a direct manner to the magnitude of units that have been produced. A direct example may be used here as follows: Take a certain motor vehicle manufacturing company that requires a power battery per vehicle that they produce. If the number of vehicles produced is varied; such that there is a reduction in the number of vehicles produced in a given operation period, then the number of power batteries needed to serve these vehicles will vary proportionately. A decrease in vehicles manufactured by 15% will, therefore, lead to a 15% decrease in the costs of power batteries used. ...Show more

Summary

Variable costs will be seen to change in a business scenario once the business varies its production levels, fixed costs cannot be varied in response to variances in the aggregate activity or firm’s output and mixed costs are those costs that possess both fixed and variable elements in them.

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