Question

What are examples of variable costs, and what strategies do financial leaders use to forecast them? ( 200 - 300 words please )

Answer 1

Variable costs are expenses that vary in proportion to the volume of goods or services that a business produces. In other words, they are costs that vary depending on the volume of activity. Variable costs increase as the volume of activities increases and they decrease as the volume of activities decreases. The Most Common Variable Costs Direct materials, Direct labour, Transaction fees, Commissions, Utility costs

Essentially, if a cost varies depending on the volume of activity, it is a variable cost.

To Forecast Fixed Cost the following Method can be used.

Linear Regression

Linear regression establishes a linear equation of the form y=mx+b from the available data. If y is the cost variable and x the production volume, the fixed cost is b and the variable cost is m. To find m from the 12 monthly cost and production values, calculate the sum of the production volumes, the sum of the squares of the production volumes and the sum of the costs, calling them X, X2 and Y respectively. Multiply each production value by its cost and add the results, calling the total XY. Divide the square of X by 12, subtract the result from X2 and call the answer SXX. Divide X times Y by 12 and subtract the result from XY, calling the answer SXY. SXY divided by SXX equals m.

High-Low Method

A simpler method is to base your estimates on the highest and lowest production volumes and their associated costs. For example, you could use the highest and lowest monthly production volumes of the past year. Subtract the total cost of the lowest production volume from the cost of the highest production volume. Subtract the number of items in the lowest volume from the number in the highest volume. Divide the resulting cost by the calculated volume to get an estimated cost per unit.