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Running Head Understanding Different Cost
Variable, Fixed and Mixed Cost
Phase 2 Individual Project ACCT614-1002B-04 Applied Managerial Accounting Dr. Tracie Edmond By Delisa C. Fryer May 30, 2010
and explain how these differences affect the operating. to help determine the cost behavior pattern. it will also give a clear understanding how volume increase/decrease will affect variable. it could be due to outside changes or goals set by the company. some change and some do not. . The company¶s finances are essential to its survival and recognizing the different cost. The company could simply make adjustments to increase profit or decrease waste.2 Running Head Understanding Different Cost Variable. fixed and mixed cost. is one of the first things that you should know. Businesses have many expenses. and pricing decisions of SAC. Fixed and Mixed Cost Abstract As financial analyst for SAC my job is to give you a clear understanding of the different types of costs that the accounting department conducts everyday. and give the definition of each. This will include the total cost of each. This paper will indentify these cost.
2010). . packaging. Some examples of SAC¶s variables are raw materials. If SAC use the units-of-production depreciation method. Variable cost increases or decrease. If our production is high. using the units-of-production depreciation method then the more spark plugs it makes the more it depreciates (Cram. because variable cost varies with revenue. Variable Costing: Variable cost are cost that vary with sales for SAC.com. If SAC uses JIT method. the higher the variable cost will be.000 spark plugs. Part: Overview: after reviewing SAC journal activity I will indentify SAC variable fixed and mixed cost.3 Running Head Understanding Different Cost Variable. It may seem easy to indentify these costs. such as production volume or sales. This paper will give you a clear understanding of the different types of cost. and production incentive bonuses. 2010). Variables will increase or decrease as a direct result of increase or decrease of business. These costs can drive our funding needs because investors will consider this cost before investing in SAC. but it is not. then depreciation is treated as a variable. unit variable cost. it could be good for producing 100. total fixed cost. II. This is also the test for determining which cost should be included in SAC variable cost analysis. and total variable cost. Part: Cost Analysis a. They are directly proportional to the level of business activity of SAC. Fixed and Mixed Cost I. these cost are different from fixed cost that remain the same. we could do a better job of keeping variable cost in check (accountingcoach. which the companies carry to stay in business. Some machinery may be treated as a variable. We will also look at the affects of sales volume increase or decrease will have on unit fixed cost. and if the next month sales are low then our variables decrease. for example if we sale more in one month then the last then variable cost increases.
Fixed Cost. such as inventory valuation and income determination. relevant cost analysis. they remain the same . are priced higher because of their new innovation. Costing is assigned to different products mostly for pricing reason. and other outside agencies. fixed costs are not really the costs of any particular product.4 Running Head Understanding Different Cost Variable. Break-Even and Cost-Volume-Profit (CVP) analysis. 2010).Fixed costs are costs you pay for even if we do not produce anything at all at SAC. When you using variable costing. including all inventory. the spark plugs. the more of these spark plugs are sold the higher the product cost (accountingmanagement. It also impacts fixed costs on profits emphasized. The advantages of variable costing accounting managers find it easy to use and understand net income is closer to net cash flow. it is consistent with standard cost. January entries for 2006 Unit Product cost Direct materials Direct labor Variable manufacturing over heard 19360 $ = 19360 8500 +8500 8700 + 8700 Unit product cost=direct materials + direct labor + variable manufacturing overhead b. Variable costing is use for internal management. If SAC prefers to use the variable costing method. These cost do not change with any of the business activity. another is the cost of goods sold (CGS). it will need to convert to Absorption Costing for the IRS. Fixed and Mixed Cost The hardest variable cost to determine is labor cost. and flexible budgeting.com. and short-term decision making. it is easier to estimate the profitability of a product and segments. Profits are not affected by the changes in inventories. An example of variable costing would be Sparklin Automotive Company.
the fixed cost will become higher or lower. which is used for a full year. the electricity would remain fixed. TFC (Total Fixed Cost) = TC (Total Cost) ± TVC (Total Variable Cost) Total Fixed Cost = Total Cost . is $15. Some examples of fixed cost are mortgages or rents. Fixed costs are fixed over the short term. are made up of fixed and variable cost.5 Running Head Understanding Different Cost Variable. This method separates mixed cost into its fixed and variable elements by analyzing change in cost between the high and low levels of business activity. 2010). not forever. Mixed Cost. usually quarterly. but insurance and parking fees could account for depreciation.00 or $15 million dollars. The period that contains the lowest level of activity is selected as your first point and the period with the highest point is selected as our second point (Cliffs notes. and annually. for example our annual expense to operator the transportation at SAC. Depreciation of capital assets are mostly fixed cost. although the nature of the cost will remain fixed cost. Fixed and Mixed Cost whether your revenue for the year. The cost would either increase or decrease depending on sales. which are mixed costs. Example of fixed cost for SAC is the manufacturing overhead cost. such as payroll salaries. such as air conditioning or lighting. and insurance. They can be partly fixed and variable. utilities. At sometime as the company grows or fails. with increase or decease in employees. but additional cost to produce more sparks plugs would be variable. Variable cost combined with fixed cost will give the total cost for SAC. Some of the expense does not change with the number of miles traveled. Variable Costs = (Y2-Y1)/ (X2 ± X1) .Total Variable Cost c. additional facilities. To estimate variable and fixed elements we can use the high and low point method. sometimes assigned to the direct labor cost.consist of variable cost and fixed cost. Fixed costs are usually expenses that are not included in the cost of goods sold.
There are disadvantages of using this method. and the change is business activity at two points.6 Running Head Understanding Different Cost Variable. Using this method during certain periods can misrepresent the normal period. 2004.2010). The least ±square regression uses all points of data rather then two. giving you an accurate analysis (Averkamp. In January raw materials inventory was 19360 and in December it was 10000 = 19360/10000 = 1. . There is one more flaw in this method. Fixed and Mixed Cost Y2 = Cost at the high level of activity Y1 = Cost at the low level of activity X1 = High activity X2= Low activity level Or Variable cost = Change in cost/Change in activity When this method is used the variable cost is estimated by dividing the difference in cost between the high and low activity levels.936 difference (Cliffs notes. when costs are very high or low it tends to be inaccurate. 2010). ³it is simple´ but is only utilizes two points and generally two points are not enough to give you an accurate cost analysis. Some other methods used are scatter diagrams and least-square regression.
related to factory insurances. it was very hard trying to maintain fixed cost. So they are only fixed over a particular range of activity. indirect labor and factory property tax. Luckily we have been very profitable lately and are able to pay fixed cost. taking the advance of the pricing. b. and paying overtime premiums. 2010). SAC could order and store large quantities of raw materials for future use. employee training. These cost can vary based on quantities ordered. Fixed cost are fixed for a certain level of production. it may include or fixed expense and depreciation of . Transforming SAC¶s fixed cost to variable cost could better insulate its bottom line.variable cost are subject to adjustments as well. During the years of low sales. The affects sales volume increase/decrease can depend on the business implications of the fixed cost structure. with cutbacks on advertising. Although these cost are not easily adjusted discretionary fixed cost. Affects Sales volume increase/decrease has on total fixed cost. etc (Walter. Being able to carefully understand cost structure. SAC machinery runs 8 to 12 hours per day depending on sales. Good planning and synchronizing operations. The nature of the SAC will have a lot to do with defining its inherent fixed cost. SAC is historically burdened with high fixed costs. properly planned can result in avoiding cost.it is important to understand fixed cost implications in managing SAC. Ramping up production. If fixed cost is overhead. 2010). Part: Affects of Sales Adjustments on Cost Variable. Affects Sales volume increase/decrease has on unit variable cost. may not be the best decisions. restructuring business to decrease cost would be more affective. and possibly seeking more outsourcing to decrease labor cost. c.7 Running Head Understanding Different Cost III. and our direct labor cost. Fixed and Mixed Cost a. so that variable cost patterns are established in the most economic way (Walter. such as our property mortgage.
SAC must analysis their business cost structure. Affects Sales volume increase/decrease has on total variable cost. In order to be success understanding the appropriate classification of these cost behaviors and applying the specific process within the relevant activity range. it has taught me one thing. as activity levels vary. knowing what products to offer at what price at what time. d. cost incurred by SAC can be classified as variable.variable cost will allow us keep raw material variable. and wages are all variable cost. or it can remain constant. all of these variable cost will decline as well. delivery shipping charges. SAC can save money by reducing our variable cost. IV. The idea situation is to squeeze maximum productive output from a given level of expenditures. There can be a rise and fall in business. these shifts are going to occur. affecting the sales volume on total fixed cost (Walter. Using variable costing would allow us to measure success and shortcomings. Fixed and Mixed Cost equipment. If sales decline. Understanding your business cost. by looking at the cost of good sold on the income statement. 2008). by reducing these you can save money. fixed. Raw materials. and the relationship between business volume and profitability is essential to SAC business health. Some of the advantages of fixed cost are a dependable accounting structure. will eliminate the additional merchandise. as well as test our new spark plugs easily. Depending on the activity or behavior. ³the only sure thing is that nothing is a sure thing´. and produce only what is needed. orchestrating operations so that each component is fully utilized. 2010). If there is increase in demand for our products. producing just what you need. Conclusion. it will cause a shift. .After researching behavior cost. is a management¶s job (Walker. or mixed cost.8 Running Head Understanding Different Cost Variable.
The more operating leverage the greater the sensitivity of the profit to changes in volume. You can calculate it with the equation approach. . Profit = Sales . Fixed and Mixed Cost is a challenge. Operating leverage is high proportional of fixed costs in relation to variable cost. in turn increasing or decreasing the breakeven point.9 Running Head Understanding Different Cost Variable.which is based on the net income equation. and fixed cost + variable cost = sales price x units SAC profit increase or decease it will affect the contribution margin. it is used to calculate the break-even point.Total Cost Total cost = sales. 2010). Using CVP is at the core of all techniques. volume levels to achieve SAC goals (Walter. Break-even±point is where SAC revenues and expenses are equal.
(2004-2010) Fixed and variable costs Retrieved May 30.com. H. Fixed and Mixed Cost Accountingformanagement.com/study_guide/Cost-Behavior.com (2010) Introduction to Managerial Accounting (Cost or Management Accounting) http://accountingformanagement.html College-cram.html?cat=3 Walter.com/ Averkamp.accountingcoach. 2010 from http://www. M.articleId21228.2010) What are mixed cost? Accountingcoach.10 Running Head Understanding Different Cost V. (2004.cliffsnotes.topicArticleId-21248. PhD (2010) Principles of accounting cost-volume-profit Retrieved from http://www. L.college-cram. (2008) Understanding cost behavior and classification Retrieved from http://www.htm .com/online-accounting-course/30Xpg05.principlesofaccounting.html Cliffs notes (2010) Cost behavior Retrieved June 1. 2010 from http://www..associatedcontent.com/chapter%2018.com Retrieved May 31. 2010 from http://www.com/study/finance/financial-analysis/fixed-costs/ Walker.com/article/1097555/understanding_cost_behavior_and_classificat ion. References: Variable.
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