Question

Distinguish the difference between Fixed, Mixed and Variable costs. List an example of each. Why is it important for managers to understand cost behaviors?

Answer 1

Fixed costs

These are costs that do not change with level of production, but are a function of time.

For ex ; Rent, Interest

Variable costs

These are costs that change in proportion to change in production

For ex: Raw material cost, Variable OH, Labour costs

Mixed costs

These are costs which are mixture of Fix and variable costs

For example : Commission 5 per piece sold subject to minimum of $10000

Managers should be able to differentiate these costs for following reasons

A) To forecasts results in terms of costs and profits making sense of different costs associated with production

B) To plan production and maximise profits

C) To study appropriate levels of production and sales.

These are some reasons why managers should be able to assess differentr costs behaviour