9/22/2023 0 Comments Fixed cost examplesHowever, this cost can be converted to a true variable cost by paying employees a fixed amount for each pencil they make, instead of a fixed wage. If you make 25,000 pencils your cost triples because you need three employees. If you produce 11,000 pencils, you will need another employee. If one employee can make 10,000 pencils, then the employee’s wage is constant over a production range of one to 10,000 pencils. Step-variable costs are costs that are constant over a range of production. The base rent of $5,000 is a fixed cost and the five cents per pencil is a variable cost. For example, rent is $5,000 plus five cents for each pencil that is made. Commercial leases often have a fixed rent per month plus an additional rent based on the amount of production or sales. Semi-variable costs are costs that have both a variable and fixed component. If you make 2,000 pencils, the variable cost is $400 (2,000 X $.20). Total variable costs are the sum of all of the costs that vary in direct proportion to production. If erasers cost 20 cents each, the variable eraser cost of making 1,000 pencils is $200 (1,000 X $.20). If you make 5,000 pencils you need 5,000 erasers. If you make 1,000 pencils you need 1,000 erasers. So erasers are a variable cost of making pencils. For example, if you are a pencil maker, you need an eraser for each pencil you make. Variable costs are those costs that vary directly with the amount of production. So, for decision-making purposes, costs are categorized as either fixed or variable. For example, the depreciation on an ethanol facility is the same regardless of whether the facility is operated at 75% of capacity or 100% of capacity. Fixed costs remain the same regardless of the amount of production. A cost is a variable cost if it increases (decreases) as the volume or production levels increase (decrease.) For example, the amount of a raw material used in the production process increases as more units of a product are produced (more corn is used to make more ethanol.)įixed costs do not change with changes in production. They are classified as either variable or fixed.Ī cost is variable or fixed depending on whether the amount of the cost changes as the volume of production changes. For this purpose, costs are categorized into two basic types. However, using costs for decision-making is much different. Categories such as advertising cost, administrative costs, labor costs and many others are used that help identify the type of cost. When accountants prepare financial statements of past performance, they use a variety of categories for recording costs.
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