Question

What are the pros and cons of fixed and variable expenses?

Answer 1

Solution:

Explanation:

Expenses can be divided into two categories i.e Fixed expenses or Variable

Expenses.Expenses that are fixed ae considered as Fixed expense whereas expense

which change with change of sales are called Variable expenses

Fixed Expenses:

Fixed Expenses are those expenses which remain constant irrespective of sales,

production or any other activity.These expenses do not change with change in production

or sales for e.g. Rent expense, electricity expense, salary , insurance etc. irrespective of

units produced or sold Fixed expense would remain the same.

Pros of Fixed Cost:

As fixed cost remains constant irrespective of quantity produced, the average cost per unit

would decrease if quantity increases

e.g. if Rent $9000 , Quantity produced 900

Fixed cost per unit = $9000/900 = $10

However if Rent $9000 ,Quantity produced increased to 1000

Fixed cost per unit = $9000/100 = $9

Average cost of product has reduced to $9 when quantity increased to 1000

Cons of Fixed Cost:

As fixed cost remains constant irrespective of quantity produced, the average cost per unit

would increase if quantity decrease.

Variable Cost:

Variable Cost are those cost which are diectly related to sales , production , it is a per unit

cost. Higher the sales higher the variable costs and vice versa for e.g.Material , labour,sales

commission etc. Variable cost is calculated by multiplying quatity * Variable cost per unit

Pros of Variable cost:

As the cost dependes on sales/production volume.Higher the quantity higher the cost

and vice versa.

Cons of Variable cost:

Per unit cost would remain same irrespective of quantity.Even if higher quantity are produced

total cost would increase in proportion of sales /production.Per unit cost would not decrease with

change in quantity.