Question

Consider the current costs of things that are currently in your life (whether you pay the cost or not).

Name at least one of each of these and describe how it fits the category of costs.

1. variable cost (what is the activity this is based on)

2. fixed cost

3. mixed cost (describe how it is mixed)

thanks!!

Answer 1

1)

Variable costs are those costs which vary when the production volume varies and variable cost per unit is always fixed. For example, direct materials per unit is $5 and the total production volume is 5,000 units so the total variable cost is $25,000 (5,000 * $5) and if the production volume changes from 5,000 to 9,000 then the variable cost is $45,000 (9,000 * $5).

In this case, the variable cost is $25,000 at 5,000 volume and $45,000 at 9,000 units so the variable cost is varied when the production volume changes but the variable cost per unit of $5 is same even the volume changes like $25,000/5,000 = $5 and $45,000/9,000 = $5.

2)

Fixed costs are those costs which are fixed even when the production changes and fixed cost per unit changes when the production changes. For example, Rent, Salaries etc, will need to be paid monthly without any relation to the production changes monthly in that case, if the rent is $6,000 monthly and if the production volume for first month is 8,000 units and second month is 11,000 units so fixed cost per unit in first month is $0.75 ($6,000/8,000 units) and in second month is $0.55 (6,000/11,000 units). Therefore, the fixed cost per unit is not same when the production volume changes but the total fixed cost is same when the production volume changes.

3)

Mixed costs are those costs which are combination of both fixed and variable costs and these costs are accounted separately by dividing into variable and fixed costs. For example, manufacturing overheads will be both variable (direct materials, direct labor etc.) and fixed (factory rent, factory salaries etc.) in such cases, such mixed costs are reported separately based on the percentage allocated like 60% of manufacturing costs are variable and remaining 40% of manufacturing costs are fixed. These mixed costs will have both the features of variable and fixed costs as explained in the above two sub parts.