Homework SourseLO 1 Describe how the identification of variable fixed and m
Solution
Answer:-
The above Question has to parts
1. what is variable cost , fixed cost and mixed cost ( also Known as Semi- Variable Cost )
2. How there identification leads to cost comparision and better undestanding of it.
so lets start with Part 1
VARIABLE COST :-
Variable costs change in direct proportion to the level of production. This means that total variable cost increase when more units are produced and decreases when less units are produced. Although variable in total, these costs are constant per unit. For example
Variable cost per unit always constant but Total variable cost increases with increase in activity or volume.
as you can see in the above example.
some examples of variable cost are :- Direct Material, Direct Labours, Variable Overhead.
FIXED COSTS
Fixed costs are those which do not change with the level of activity within the relevant range. These costs will incur even if no units are produced. For example rent expense, straight-line depreciation expense, etc.
Fixed cost per unit decreases with increase in production. Following example explains this fact:
Fixed cost per unit always changes because it never changes with change in level of activity or volume.
whether company is manufacturing or producing goods or not, these cost will still incurred .
such as :- Factory Rent, Interest on Borrowed Capital.
MIXED COST
Mixed costs or semi-variable costs have properties of both fixed and variable costs due to presence of both variable and fixed components in them. An example of mixed cost is telephone expense because it usually consists of a fixed component such as line rent and fixed subscription charges as well as variable cost charged per minute cost. Another example of mixed cost is delivery cost which has a fixed component of depreciation cost of trucks and a variable component of fuel expense.
Since mixed cost figures are not useful in their raw form, therefore they are split into their fixed and variable components by using cost behavior analysis techniques such as High-Low Method, Scatter Diagram Method and Regression Analysis.
PART B :- How thier Identification enhances cost comparision :-
All the above costs are put together in a costing system called - STANDARD COSTING
It is very difficult to compare and find out the reasons of cost fluctuation through Historical Costing, as it ascertains costs after they have been incurred.
The reasons for cost fluctuation apart from variations in output (or units produced) may be detected through introductions of standard costing.
Standard-cost is defined by CIMA in the following way:—A predetermined calculation of how much cost should be used under specified working conditions.
It acts as yardsticks against which actual costs are compared.
Thus it facilitates effective cost control and provides necessary information for cost reduction.
Standard costing and the related variances is a valuable management tool for cost Comparision.
If a variance arises, management becomes aware that manufacturing costs have differed from the standard (planned, expected) costs.
Contrast the effects of changes in the activity level on total fixed costs and on unit fixed cost.
Total Fixed costs remain the same in total regardless of changes in the activity level. In contrast, fixed costs per unit vary inversely with activity. As volume increases, fixed costsper unit decline and vice versa.
| Total Variable Cost | $10,000 | $20,000 | $30,000 |
| ÷ Units Produced | 5,000 | 10,000 | 15,000 |
| Variable Cost per Unit | $2.00 | $2.00 | $2.00 |
