Question

In Managerial accounting, there are also three additional types of costs, these include fixed costs, mixed costs and variable costs. Please define each term and give an example of a product or service that used mixed costs. One example includes the old cell phone bill. Remember when your minutes were free after 9pm? If you received or made a call duing the day, it would cost you $.05 per call. Therefore you had your monthly fee (fixed costs) and your additional $.05 a minute for daytime calls as your variable cost. Provide an example of a product or service with mixed costs

Answer 1

Fixed cost - A fixed cost is a cost that remains same regardless of company's level of sales / output. Fixed costs are not based on production volume.Whether there is any production or sales in a company or not, fixed costs will be incurred.

Example - Rent of factory. Whether any activity is taking place or not, factory rent is to be paid to the owner of factory.

Other Examples - Salaries of employees, Insurance, Depriciation etc.

Fixed cost is opposite of variable cost.

Variable cost - A variable cost is a cost that increase or decrease in proportion to production activity. If production increases, variable cost will also increase. If production decreases, variable cost will also decrease.

Example - Raw Material per unit = $10

If production activity = 1000 units

Raw material cost = Raw Material per unit × production activity

= $10 × 1000 units

= $10000

If production activity = 800 units

= $10 × 800 units

= $8000

If production activity = 1200 units

= $10 × 1200 units

= $12000

Other Examples of variable costs=

Sales commission, packaging, shipping, labour etc.

Variable cost pet unit / batch /litre etc is calculated.

Mixed cost -

Mixed cost is a cost that is combined of both fixed cost and variable cost. In other words, one part of mixed cost would remain fixed irrespective of production and sales activity and other part of it would increase or decrease in proportion to the increase or decrease in production or sales activity. This other part is variable cost. For this, variable cost per unit is calculated.

Example of mixed cost -

Salaries of employees-

$5000 is fixed salary. Apart from this, for each 100 units produced, there is $10 per unit bonus. This is variable cost for company.

If employee A produces 200 units, his salary would be =

$5000 + ( 200 units × $10 per unit)

= $5000 + $2000

= $7000

If employee B produces 400 units, his salary would be =

$5000 + (400 units × $10 per unit

= $5000 + $4000

= $9000

Mixed cost is also called semi - variable cost.