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Managerial accounting and cost methods. Fixed and Variable (Semi-variable or mixed costs)

Discuss the differences between fixed, mixed and variable costs by provide two examples of each type of cost as they relate to a company you have worked for in the past, currently work for, or plan to work for in the future. Why do you think it important for managers of this organization to understand the differences in these costs (be sure to provide a specific related example)?

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Answer 1

Answer :

As I am working in an educational institution,In my perspective Fixed ,variable and semi variable costs involves the following.

Fixed Cost : This are the cost incurred irrespective of the amount of operation. But if we calculate per unit cost it will change depends upon the amount of operation.

For example: In this Covid 19 period most of the classes are ideal, eventhough the management need to pay rent for the building.

Further, Mnagement needs to pay the salary of employees even if the students are not coming.

Variable cost: This cost directly vary in total in proportion to output. But per unit variable cost remain constant.

For example: Student's fees. It is fixed per head, when more students get admitted means more fees to the organisation.

Another example is that,Uniform to students,per unit cost constant,if more production of uniform more cost.

Usage of electricity.

Semi variable

The nature of this cost is that it is partly fixed and partly variable.

For example: Operating expense of Bus in the school. Some cost like insurance are fixed and some like fuel are variable.

Printing and stationary works relating to office, Wages to Indirect labourers etc.

Importance of Understanding the difference between these costs

First of all, for running a business organisation it is necessary to seggregate the amount of cost into fixed,variable and semivarible. Then only the business can controle variable cost and semi variable and can reduce per unit fixed cost.

By using this the organisation can decide Break Even Point and Margin of safety. If they can provide goods or service beyond break even point they can earn sufficient amount of profit. Because at this point total cost and revenue are equal. Fixed cost upto a point eill be constant, so organisation need to worry about variable cost only,then they can make huge contribution.

Cost Volume Profit A nalysis is done by analysing fixed and variable cost,an organistion can earn desired profit also using this cvp analysis.