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Fixed and Variable Costs
In accounting, there are really two types of costs that affect business expenses: Fixed and Variable. They may be thought of in general as a system in which fixed costs form the base and variable costs ride on top, but may increase or decrease based on individual organization differences and structures (See figure 1). Fixed costs are expenses that are not dependent upon the goods or services produced by the organization, but are costs that occur on a regular basis, regardless of what the business does. In other words, these costs are "fixed" over time -- often referred to as overhead. For example, regardless of production, an organization must pay rent, utilities, insurance, etc. each and every month (Hansen, D., et al., 2009).
Variable costs, in contrast, change over time in proportion to the goods or services provided by the business. They are also known as marginal costs or operating costs and there are several components. Labor, for instance, can be a variable cost if it is in proportion to the amount of production. However, if labor is contracted or unionized, and must be paid whether there is adequate work or not, it changes to become a conversion cost. Variable costs may be best understood...
Utilities, though, are considered to be Fixed Costs because the occur on a regular basis. However, if it takes X to simply pay for basic utilities, but when production is increased, then electricity is also increased by 40%, then a portion of the utilities are variable costs because they change in accordance to the amount of materials produced (Hansen, et al.).
For an organization to be healthy, it is necessary to balance fixed and variable costs, particularly in the 21st century global economy when almost every aspect of the business happens more quickly. To balance fixed and variable costs, experts suggest that the infrastructure should be flexible and planned on reality rather than complete projection. Supply chain management will help provide a relationship with vendors so materials can be delivered quicker and when needed through just in time inventory. Greater part time or flexible working environments will help balance labor when necessary, as will building staff slowly using part-time or outsourced resources in…
References
Gish, W. (2013, April). Relationship Between Fixed & Variable Costs Used in a Flexible Budget. Retrieved from The Motley Fool: http://wiki.fool.com/Relationship_Between_Fixed_%26_Variable_Costs_Used_in_a_Flexible_Budget
Hansen, D., et al. (2009). Cost Management: Accounting and Control. Mason, OH: Cenage/SouthWestern.
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Balance Sheet Financial analysis is critical to determining the intrinsic value of a company. Analysts, hedge funds, institutional investors and retail investors alike all use various forms of information to determine a fair price to pay for a security. This information is generally acquired through the financial statements of the particular company being researched. In addition to the many forms of information gathering within the market, there are also many philosophies
fixed costs that Cat and Dogs, Inc. have include rent and executive salaries, which are paid no matter how many units the company builds. The company's total fixed costs are $113,200 per month. Variable costs are the factory labor and raw materials, which are $2.20 per unit ($1.50 labor plus $.70 raw materials). The company's gross profit margin per unit is 72.5%, calculated as $5.80 ($8.00 per unit sales
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However, none was found that centered on small hotels in China. This research add to the existing body of research by providing an assessment of the balanced scorecard method in this special business setting. The information obtained by this study will help to make small hotels in China more competitive and able to compete well into the future. This research will play an important role in the development of the
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The service offered relies on high level of capital investments in aircraft, as well as the support services. The variable cost per passenger is relativity low. The airlines will seek to minimize their variable costs as the same time as using the capital investments in a wise manner to maximize revenues. One example of this is Southwest Airlines, the founder of the low cost carrier model, where the variable