Question

*Machines oiled every 2,000 hours of use. Machinery does not run 24/7 and has downtime. Cal and B.J. asked you why you cared about the cost behavior of their different expenses. Explain to them what a variable cost is and what a fixed cost is. Explain to management what the role and value of management accounting is. Explain the ethical responsibility you would have as LPIC's managerial accounting consultant. List the stakeholders affected by the recommendations and decisions that you and management make. What responsibility do you and management have to those stakeholders?

Answer 1

Cost behaviour of different expenses need to be studied carefully as they affect the cost and pricing of different products. Also, they are important in decision making such as make or buy decisions, pricing strategies etc. Cost behaviour can be ascertained on the basis of various factors. One of such factors is classifying them as fixed cost and variable cost.

Fixed Cost : Fixed costs are those costs which are fixed by nature. It means these costs merely do not change when there is a marginal change in priduction level or we can say that these costs do not increases or decreses when there is a simultaneous change in the quantity produced.

For example: Rent of premises, Electricity Expenses etc.

Variable Cost: Variable costs, as the name sugeests, are variable in nature. It means they change with a simultameius change in the level of production. These costs are usually calculated on per unit basis as the increases or decreases with every extra or less unit produced.

For example: Material, Labour etc.