Compare Fixed, Variable, And Mixed Costs — What Do They Mean

Compare Fixed Variable And Mixed Costsq10 2 What Do We Mean

Compare fixed, variable, and mixed costs. Define what is meant by a relevant range. Analyze a professional services business with fixed costs of €150,000 and variable costs of €15 per hour to determine how the average cost changes between 12,000 and 15,000 units. Use given data to calculate breakeven in units, breakeven in euros, units needed to approach target profit, and estimated revenue from sensitivity analysis. Evaluate the margin of safety if expected sales are 50,000 units. Assess whether BCD Inc should accept a special order of 2,000 units at a discounted price, considering costs and capacity. Define standard cost. Compare job costing with process costing. Calculate spare capacity for Little Known Tax Ltd based on weekly costs and hours charged. Analyze outsourcing decision for Last Group considering costs of internal vs. external telemarketing services. Determine the daily cost rate of a salaried consultant accounting for working days and productivity. Calculate the estimated cost of a market research project using absorption costing, considering all relevant direct and indirect costs.

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The concepts of fixed, variable, and mixed costs form the foundation of cost analysis and managerial decision-making within organizations. Accurate classification helps in budgeting, cost control, and strategic planning. Fixed costs are expenses that remain constant regardless of activity levels within a relevant range, such as rent or salaried employees. Variable costs change proportionally with activity volume, like direct materials or hourly wages. Mixed costs contain elements of both fixed and variable components, exemplified by utility bills that have a base charge plus a usage-based fee (Drury, 2018). Understanding the distinctions among these cost types is essential for effective cost behavior analysis and informed decision-making.

The relevant range refers to the scope of activity within which a particular cost behavior pattern holds true. Typically, within this range, fixed costs remain unchanged, and variable costs per unit stay constant (Horngren et al., 2020). Beyond this range, cost behavior may shift due to factors like economies of scale or capacity constraints. For instance, a manufacturing plant might have stable fixed costs for a certain production volume, but if output exceeds capacity, additional costs, such as overtime or expansion expenses, may arise. Recognizing the relevant range ensures accurate cost estimation and avoids misleading conclusions when planning and analyzing operations.

In examining a professional services business with fixed costs of €150,000 and variable costs of €15 per hour, the average cost per unit decreases as output increases due to the spreading of fixed costs over more units. At 12,000 units, the total cost is fixed costs plus variable costs: €150,000 + (€15 × 12,000) = €150,000 + €180,000 = €330,000. The average cost per unit is €330,000 / 12,000 ≈ €27.50. Similarly, at 15,000 units, total costs are €150,000 + (€15 × 15,000) = €150,000 + €225,000 = €375,000, and the average cost per unit becomes €375,000 / 15,000 = €25. The reduction in average cost from €27.50 to €25 illustrates economies of scale due to spreading fixed costs over a larger number of units.

Regarding breakeven analysis, with fixed costs of £240,000, a selling price of £18.00 per unit, and variable costs of £12.60, the contribution margin per unit is £5.40 (£18.00 - £12.60). The breakeven point in units is calculated as Fixed costs divided by contribution margin per unit: £240,000 / £5.40 ≈ 44,444 units. The breakeven sales in pounds is then 44,444 units × £18.00 = £799,992. To reach a target profit of £120,000, the required contribution margin is £240,000 + £120,000 = £360,000. The units needed are £360,000 / £5.40 ≈ 66,667 units. The sales amount in pounds is 66,667 × £18 = approximately £1,200,006. A sensitivity analysis indicates how many units must be sold at different price points to achieve target profit, considering changes in costs or price.

The margin of safety measures how much sales can decline before reaching the breakeven point. At an expected sale of 50,000 units, the margin of safety in units is 50,000 - 44,444 = 5,556 units. The margin of safety as a percentage is (5,556 / 50,000) × 100% ≈ 11.11%. This indicates the firm can withstand an 11.11% drop in sales before incurring losses, providing a buffer against market fluctuations.

In evaluating a special order, BCD Inc sells at $12 per unit with a current sales volume of 10,000 units, fixed costs comprising $3 per unit, and variable costs of $10 per unit. The extra order of 2,000 units at $9 per unit must be considered against the variable costs. Since the production costs at the current capacity include fixed costs allocated per unit, but the company still has spare capacity, additional units can be produced without affecting existing sales. The relevant cost for the special order is the variable cost of $10 per unit. Since the order price of $9 is below the variable cost of $10, accepting the order would lead to a unit loss of $1. Therefore, from a financial perspective, the company should reject this order unless there are strategic reasons or excess capacity that could lead to future profitable opportunities (Drury, 2018).

Standard cost refers to a predetermined or estimated cost of performing an operation or producing a unit, based on efficient operations under normal conditions. It serves as a benchmark for evaluating actual performance and controlling costs. Standard costs encompass direct materials, direct labor, and manufacturing overheads (Garrison et al., 2020). By analyzing variances between actual and standard costs, managers can identify areas of inefficiency or wastage, enabling targeted corrective actions.

Job costing and process costing are two methods used in cost accounting to allocate manufacturing costs. Job costing assigns costs to specific jobs or orders, often used in industries where products are customized, such as construction or consulting. Process costing averages costs over large volumes of identical units, typical in continuous production industries like chemicals or food processing. While job costing tracks individual job costs, process costing focuses on accumulating and assigning costs to departments or processes (Horngren et al., 2020). The choice depends on the nature of production and the need for detailed cost information.

Little Known Tax Ltd employs six bookkeepers costing £10,000 weekly, each charged with 30 hours per week to client jobs. The total hours charged are 150 hours, indicating spare capacity. The total available hours are 6 × 30 = 180 hours. Actual hours used are 150, so spare capacity is 180 - 150 = 30 hours or one full bookkeeper’s worth of hours. The cost per hour is £10,000 / 30 hours = approximately £333.33 per hour. The firm’s spare capacity in terms of hours equates to 30 hours per week (Garrison et al., 2020).

For Last Group, fixed costs of €25,000 monthly, casual staff costs of €12,000, and call costs of €5,000 total €42,000 per month. The outsourcing proposal costs €15,000 monthly. The fixed and variable costs per activity suggest that outsourcing may be cost-effective if it reduces costs and maintains service levels. Total internal costs (fixed + casual + call costs) are €42,000, whereas outsourcing would costs €15,000, potentially saving €27,000 per month. The decision should consider qualitative factors such as control, quality, and reliability, but from a purely financial perspective, outsourcing appears beneficial (Garrison et al., 2020).

Calculating the daily cost rate of a salaried consultant with an annual salary of £80,000 involves dividing the annual salary by the number of working days and adjusting for productivity. Assuming a 250-day work year, the daily rate is £80,000 / 250 = £320. Adjusted for productivity of 81%, the effective daily cost becomes £320 / 0.81 ≈ £395.06. This figure captures the actual cost per day of employing the consultant, considering productivity efficiency (Drury, 2018).

For the market research project at Upper Central Consultancy, all relevant costs should be included based on absorption costing principles. The costs include in-house hours valued at £22 per hour for 135 hours, totaling £2,970; outsourcing 140 hours at £16 per hour totaling £2,240; data purchase costs of £2,050, plus updated report costs of £500. Printing and postage costs are £1,100, and internal processing at £2,000. The specialist software costs £1,750, with training costs of £600. Management overhead for 14 days at £550 daily plus extra overtime costs of £3,500 sum to £10,350, while the supervisor's cost is £1,600. Summing all relevant direct and overhead costs yields a comprehensive total project cost, which guides the bid and pricing strategy (Garrison et al., 2020).

References

• Drury, C. (2018). Management and Cost Accounting. Cengage Learning.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2020). Managerial Accounting. McGraw-Hill Education.
• Horngren, C. T., Datar, S. M., & Rajan, M. V. (2020). Cost Accounting: A Managerial Emphasis. Pearson.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2020). Managerial Accounting. McGraw-Hill Education.