In: Accounting
Describe three different ways in which managers determine cost behavior, which do you think is most accurate? How can you visualize cost behavior and why is this important?
Three different ways in which managers determine cost behavior are
1. Variable Cost
2. Fixed Cost
3. Semi-Variable Cost
Variable Cost
Variable costs are costs that change as the quantity of the good or service that a business produces changes.Examples of variable costs are sales commissions, direct labor costs, cost of raw materials used in production, and utility costs.
Fixed Cost
Fixed costs, indirect costs or overheads are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as interest or rents being paid per month, and are often referred to as overhead costs.
Semi-Variable Cost
A semi-variable cost, also known as a semi-fixed cost or a mixed cost, is a cost composed of a mixture of both fixed and variable components. Costs are fixed for a set level of production or consumption, and become variable after this production level is exceeded.
Which is more accurate ?
As the variable costs change with action level variable cost will in general be progressively exact and accurate.But we cannot exactly say which is accurate, it depends on facts and figures.
Since they stay the same throughout the financial year, fixed costs are easier to budget. They are also less controllable than variable costs because they're not related to operations or volume. Variable costs, however, change over a specified period and are associated directly to the business activity.
Why is this important?
* It helps company to price their product.
* It help the company to analyse cost.
* It help company to analyse performance and growth of compnay.
* It helps business to take many decisions such as make or buy, shut down production, further process or not etc.