Question

A new product line is also being proposed and it is expected that theaccountants will discuss this option. Explain the difference between fixed and variable costs and state at least three examples of each that the company mayincur.

Guidelines:

1.Clear explanation of the difference between fixed and variable costs

2.Identified and explained at least three examples of fixed and variable costs for the new product line

Answer 1

FIXED COSTS- fixed cost are those Which remains the same no matter what the output is.

No matter how much units of a product you produce the fixed costs remains the same.

VARIABLE COSTS- variable costs are those costs are those costs which vary with the level of output, Which means if the output is more the more variable costs and if output is low the low variable costs.

DIFFERENCE BETWEEN FIXED AND VARIABLE COSTS-

Basis	FIXED COSTS	VARIABLE COSTS
Meaning	fixed costs are those costs which remains fixed no matter what the output is.	Variable costs are those costs Which vary with the level of output
Nature	Fixed costs are time related Which means that they occur only after a certain time period.	Variable costs are volume related that means that if the output is more the more will be variable costs and vice versa.
Time of occurrence	fixed cost are fixed and they will always be incurred even if the output level is zero.	Variable costs occurr only when there's production of goods or services.
Behaviour	It remains fixed for a certain time period	They change with the change in output level
Per unit cost	The fixed costs decreases as the number of units produced increases and vice versa.	Variable costs remains the same on per unit.
Consists of	Fixed costs consists of- Fixed adminstration overheads,Fixed selling and distribution overheads and fixed production overheads.	Variable costs consists of- Raw material, labour, Direct expenses, variable production overheads.
Examples-	Rent (rent of the building), depreciation, salary ( paid to employees) , insurance.	Wages, commission on sale, raw material used, expenses in packaging.