Accounting: Fixed vs. Variable Costs

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variable costs:

Changes in total, in direct proportion to changes in the level of activity. The total cost increases/decreases as units made increases/decreases.

items that will always be variable costs:

-direct materials
-direct labor
-variable overhead
-sales commissions
-shipping.

it is a _cost of if it cost you more if you make or sell more:

variable cost.

fixed costs:

-total cost does not change with changes in the volume of activity (within the relevant range).
-the cost per unit WILL change as volume (number of units) changes. total
(the total amount may be different than expected; however, this will not be due to changes in the volume of units made or sold).

Costs that will always be fixed:

-rent
-salaries
-property tax

mixed costs (semi-variable):

one that contains both fixed and variable elements: Fixed - minimum cost of having a service ready and available for use
Variable - cost incurred for actual consumption of the service

charges for a cell phone is $39.99 plus $.40 for each minute used for 400 minutes is an example of:

mixed cost.

relevant range:

The range of activity where the assumption about cost behavior is valid.

Example: The company's fixed costs will remain fixed as long as
production greater than 1,000,000 units is not required.
If more than that must be produced, then a new facility with
higher facility costs and overhead costs will be required.

The company's fixed costs will change if they have to produce
more than 1,000,000 units. Up to 1,000,000 is the relevant range

When you are determining if a cost is fixed or variable ask yourself
the following question:

Will it cost me more if I make or sell one more product?

If yes - it is a variable cost - you pay every time you do one more
If no - it is a fixed cost - you pay a set amount regardless of volume

direct material and direct labor are always:

variable costs

MOH is almost always _ except _.

fixed, utilities.

costs that are paid monthly/annually are always:

fixed costs.

Anytime you see "worker" or "inspector" it will always be a _ cost because:

costs incurred because you pay workers to make the product. The more products you make the more it costs you. Therefore, these costs are variable costs.

utilities and sales person travels expenses are:

variable or mixed. it is determined by how the cost is paid for.

A cell phone for sales people and oil and parts for manufacturing machines are:

These costs could be fixed or mixed. This is determined by how the company plans to pay for the costs. If there is a set amount to be paid
every month it is fixed, if it varies by units made or sold, they are variable costs.

Rent unless stated otherwise will always be:

fixed.

a variable cost per unit:

remains constant. * the total variable COST will change with changes in activity, but the cost PER UNIT does NOT change.

a fixed cost remains constant in:

total.

the level of activity that current fixed costs can support without increasing is:

relevant range.

total cost formula is:

fixed cost + variable cost= total cost

as volume increases:

fixed costs stay the same and variable cost per unit does NOT change.

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