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Fixed and Variable Costs - Essay Example
Author : ezra01
Pages 2 (502 words)
1. Fixed cost is that cost that does not change significantly with the change in the level of activity. Examples of fixed cost include interest expense, salaries and expenses of the employees or executives, property taxes and insurance protection.
Variable cost is that cost that cost which changes with the change in the level of activity…
Examples of semi variable costs include electricity expense, telephone expense. In one broad category of Over head expenses, these costs are collectively shown for example depreciation of machinery as well as the heating and lighting cost. Electricity cost is a semi-variable cost because there is a fixed charge and then on any unit we use we are charged an additional amount. So this additional amount is the variable cost and the fixed charge is the fixed cost. Semi variable cost stays constant for a certain time period and then it goes to a higher cost at a specific increased volume (Leslie 1993).
For analysis purpose, the fixed part is separated from the variable part and both are written separately so that proper analysis can be done and so the company should know as to how much is their fixed cost and how much is variable.
2. A company's break-even point is its sales volume at which its total costs equal its total revenues. This means that at the break-even point, the company is making neither any profit nor any loss. If a company is operating below its break-even point it would not be able to exist in the long run as its costs (fixed and variable) would not be covered by the revenues (Susan 2008) . ...