Question

Explain the difference between fixed and variable costs and give two examples of each. Can a company budget for variable costs? Explain.

Answer 1

Fixed cost do not change with the production level untill a certain limit. For example untill we need only one factory for production there is no need of Change in rent amount. Where as variable cost increase with the production. More the production , more the total variable cost.

Also variable cost remain same for per unit basis. For example per unit material usage is always same. But as we increase production, per unit rent or per unit depreciation keeps changing.

Untill there is excess capacity available , fixed costs are not relevant for decision making of any new offer. While variable costs are always relevant for decision making.

Example

Variable cost - direct material , direct labor

Fixed cost - rent of factory , salary of supervisor

Even though there can a little variation in variable cost rates for example increase in the material prices , company can make a budget based on past experience and prevailing market prices etc. For example based on estimated overhead and estimated hours , variable overhead per unit is estimated and applied on units. In the end of period , any excess amount is reported as under or overapplied overhead.

Similarly if a machine is using 3 units of direct material for one unit of finished goods , it will not change in future. So it is predicatble. Hence budget can be made.

Feel free to ask any queries..

Also plz upvote it means a lot .. thank you