Question

Please describe, compare, and contrast your understanding of fixed costs compared to variable costs. Provide examples of how, when, and why each of these costs would be appropriately allocated.
Using a nonprofit you are familiar with, provide examples of costs that are deemed fixed and those that are considered variable. From a critical analysis perspective, is there anything you would do differently?

Answer 1

Fixed costs are those costs that do not change with activity volumes. In other words fixed costs are independent of the volume produced. In sharp contrast variable costs are costs that are directly linked to volume produced within a company and the higher the production quantity the higher will be the variable costs.

Fixed costs can be allocated using the variable cost share method. Assume that a company makes 5 different products and its total variable cost is $600. Variable cost for Product XYZ is $72. Thus the fixed cost chare of product XYZ will be 72/600*100 = 12%. Now if the total fixed cost = $1,000 then product XYZ will be allocated a fixed cost amount of 12% of $1,000 = $120.

Variable costs are allocated on the basis of cost drivers. For example the cost driver for sales commission will be the number of goods sold by a salesman.

A nonprofit that I am familiar with is called ‘Food for the poor’. This nonprofit is based in Florida and provides food, medicine and shelter for poor. Fixed costs for this nonprofit includes rent for its office space in Florida, re-accreditation fees, depreciation on its assets etc. Variable costs for this nonprofit includes utilities expense, cost of telephone and communication etc. From a critical analysis perspective the thing that I will do differently will be to determine mixed costs and separate them into fixed component and variable component using methods like high low method and least square method.