Question

In 200 words or more, Explain variable, fixed, and mixed costs and the relevant range. Original work please

Answer 1

Variable Costs

1. Variable cost is that cost, which changes or varies proportionately in relation to output/ volume / quantity

2. Generally, Variable costs = Direct materials + Direct Labour+ Direct Expenses+ Variable Overheads

3. Variable cost per unit is assumed to remain constant

4. Examples of variable costs are Raw Materials, Power, etc

Fixed Costs

1. Fixed costs are costs which remain constant, for a given period of time, irrespective of level of output.

2. Generally, Fixed costs consists of Fixed Production Overhead plus Administrative Overhead plus fixed selling overhead

3.Fixed costs are treated as period costs and are therefore chrged to Profit and Loss Account

4. Examples of Fixed cots are Rent, Salary, Insurance, etc.

3. Mixed costs ( Semi-Variable costs )

1. These are expenses that show the characteristics of Fixed and Variable costs. Examples of semi variable expenses are delivery van expenses, telephone charges, depreciation as a whole.

2.Semi-variable expenses usually have two parts-a fixed parts and a variable parts. By a systematic analysis, all semi variable exoenses can be split up into variable and fixed portions.

Relevant Range of Fixed costs

Fixed costs are unrelated to output and are generally irrelevant for decision making purpose. However, in the following circumstances, Fixed costs become relevant for decision making

1. When fixed costs are specifically incurred for any contract

2. When fixed costs are incremental in nature.

3. When fixed costs are avoidable or discretionary

4. When the fixed portion of Semi Variable costs increases due to change in level of activity consequent to acceptance of a contract.

Relevant Range of variable costs

Variable costs are relevant cost for decision making as this will be incurred in future for additional units of production..

Relevant Range of Mixed costs

Variable costs will be relevant for the decision making while fixed costs would not be relevant for decision making other than exceptions as discussed in relevant range of fixed costs part.