Question

Use your selected company or your current work environment to identify at least one cost or expense that would fit under each of the following categories:

• Variable
• Fixed
• Mixed
• Step

Would your company be more likely to benefit from using a manufacturing cost hierarchy or a customer cost hierarchy for determining cost drivers? Explain your answer and identify one cost for each of the four cost hierarchy categories. Present findings in manner that could be shared with class.

Answer 1

Solution:

1. Variable cost:

Variable Costs are expenses that vary based on production volumes. They include material, labor, utilities, and delivery costs

2. Fixed Cost:

Fixed Costs are expenses that don't change based on production or sales volumes. They include salaries, rent, insurance, accountancy costs.

3. Mixed cost:

The term mixed costs often refers to the behavior of costs and expenses. Mixed costs consist of a fixed component and a variable component.
The annual expense of operating an automobile is a mixed cost. Some of the expenses are fixed, because they do not change in total as the number of annual miles change. Think insurance, parking fees, and some depreciation. Other expenses are variable, because they will increase for the year when the miles driven increase (and will decrease when the miles driven decrease). Think gas, oil, tires, and some depreciation.
Examples are the rental of a delivery truck, where a fixed rental fee plus a variable charge based on mileage is made; and power costs, where the expense consists of a fixed amount plus a variable charge based on consumption. A further example is a total factory overhead, which is a mixture of fixed overhead and variable overhead.

4. Step cost:

  Business expenses that are constant for a given level of activity, but increase or decrease once a threshold is crossed. Step costs are those costs that change when a business' production levels increase or decrease. When depicted on a graph, these types of expenses will be represented by a stairstep pattern. For example, a coffee shop might be able to serve 30 customers an hour with one employee. If the shop receives anywhere from zero to 30 customers per hour, it will only need to pay the cost of having one employee. If the shop begins receiving 31 or more customers per hour, it must hire a second employee, increasing its costs of doing business.