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. ...
b. Fixed Costs ‘Fixed costs’, on the other hand, refers to those costs that are related to the production of various inputs that are applied in a given organization, and which (inputs) cannot be varied in response to variances in the aggregate activity or firm’s output. This, however, will depend on a given production range. Fixed costs can as well be referred to as non-variable cost outlays. Thus, these costs remain fixed for a given volume range. They fluctuate beyond the set range of production, therefore. Fixed costs also related to a high extent to time. To this point of time dependence, thus, one can note in that in the long run; fixed costs can be varied. They may as well be viewed in two major sub-headings. These are; discretionary and committed. Discretionary fixed costs are those fixed costs that can be budgeted for by a given organization’s management or marketers. Committed costs, on the other hand, are those costs that a related to the buying of assets associated with capacity production. The major characteristic that can be applied in the identification of committed fixed costs is that of its predetermination and occurrence. These two identification factors of committed costs are alterable only in scenarios of other major decisions to change or reverse the prior commitment. They are also referred to as discretionary or managed costs that emanate from the decisions by the management. They can be reduced or incurred at the management’s discretion. (Khan and Jain, 2003 pp4-12) Examples from the EEC journal entries of fixed cost outlays may include plant and equipment amounting to 80,000,000, land amounting to 1,000,000, and depreciation factory amounting to 1,600,000. c. Mixed Costs Mixed costs are those costs that possess both fixed and