Definition of fixed cost and variable cost

Fixed costs (FC) is a price that remains constant, overall regardless of the changes in inactivity. Fixed costs aren’t affected by fluctuations in the activity. Therefore, when the activity level increases and falls, fixed costs stay the same until they are influenced by an external influence. However, fixed costs per unit decrease when the activity level rises and rises as the activity level decreases. (Garrison et al., 2006, P49). Fixed costs comprise salaries for executives and employees, rent, interest expense depreciation, and insurance costs.

Variable Cost (VC) is a cost that fluctuates over time, and in direct proportion to changes in the activity level. The activity can be described in various ways, as the units produced, the units sold mileage driven, bed used or lines of printing, hours of work and so on. But the variable cost per unit remains constant. ((Garrison et al., 2006, P48).

Indirect cost and overhead cost

Direct costs are an expense that can be easily and quickly traced back to the cost item that is being considered. Direct cost is a concept that is not limited to the direct cost of materials or direct labor. (Garrison et al., 2006, P50). For instance, the salary of the manager in the marketing department is the direct expense for the marketing department. It is most likely to be the same month after month, and will and does not depend on the amount of sales products.

Indirect costs: is a type of cost that is not easily and quickly traced back to the specific cost object that is being considered. (Garrison et al., 2006, P50). Every company has its own way of assigning indirect costs to various products, sales revenue, and business units. Accountants and business managers should be aware of the methods of allocation employed for indirect costs. For instance, depreciation on production equipment is an indirect product cost. It is the same every year, and it does and does not change based on the amount of product produced by the machine.

Costs may be direct or indirect, depending on the object: department, product, or other items like division, customer, or geographical market. The total cost remains the same regardless of the volume of work changes, so it’s a fixed cost. The cost is a variable expense in the event that the total cost fluctuates according to the change in the volume of activity.

Overhead costs are the indirect, recurring costs of operating a business that isn’t directly related to the product or service manufactured and sold. These costs could include payment for rent for buildings, utility bills, and employee salaries.

Controllable costs and costs that are uncontrollable

Controllable costs are costs that can be controlled or controlled by specified employees of the undertaking. The majority of variable costs can be controlled. For instance, direct material direct labor, direct material, and direct are managed by the lower levels of management.

Uncontrollable cost: cannot be controlled by the specific participant in the company. The majority of fixed costs are not controllable costs. Examples include the cost of factory rental and supervisor’s salaries, as well as depreciation.

Examine the assertion

“I struggle with the terms direct costs, often referred to as variable costs are those that can be controlled. While indirect costs, or overheads, which are also known as fixed costs are not controllable”.

Based on the above definitions Based on the definitions above, I disagree with the assertion that the delegate made a mistake in assessing the cost. There are numerous methods to categorize costs based on the objective of management.

In accordance with the association with the products, the costs are split into period costs and product costs.

Costs, as it is a matter of identifying them, can be divided into indirect cost and direct cost.

Based on the way they behave according to the behavior, costs are divided into the fixed cost as well as variable cost and semi-variable cost.

In accordance with controllability, costs are classified into controllable costs and non-controllable costs.

The direct cost could be fixed and variable cost, based on circumstances.

For example, the salary of a supervisor in the manufacturing department is the main expense of the manufacturing department. The salary will likely be the same every month and doesn’t depend on the number of products. The salary is fixed price for the manufacturing department. The supply of raw materials for the manufacturing department constitutes a direct expense for the department, however it is an unadjustable cost. The total quantity of materials used by the department will increase if the department’s volume grows.

Indirect costs could be fixed and variable costs as well:

In contrast to direct costs, the majority of indirect costs are fixed costs. For instance, rental costs are indirect costs for production in part It is a fixed expense of the manufacturing department that is the same every month, and does not dependent on the number of products. The indirect cost could be a variable cost too. The price of electricity for the administration of the manufacturing department can be a variable monthly cost according to the quantity of electric power used greater or lesser.

Costs that are controllable and not easily controlled

The majority of variable costs can be manageable. As an example: a lower-level manager of manufacturing products is the direct supervision and control of the production process. They may be in charge of the raw materials used to make the product, and also direct workers, which means controlling the number of employees required to produce the final production. Management is able to manage the efficient use of resources in the short term. However, the majority of fixed costs are inflexible. They are imposed on the basis of management, such as the businesses cannot decide on the costs of rental for factories or the rental for his unit is decided by the management or the rate set by local authorities.

Question 2

1. Participative budgeting

It is the method through which the organizational goals are transformed into a plan which outlines the resources allocated as well as the chosen processes and the preferred timeline for achieving those objectives. There are two primary types of budgeting: bottom-up budgeting and top-down. Participative budgeting is a way of budgeting in which managers make the budgets themselves. The budgets are then examined by the supervisor of the manager and any issues can be resolved through a mutual agreement.

Manager

Marketing

Manager Sales

Vice President Sales

Vice President Finance

President and CEO

Vice President Production

Cashier

Controller

Manager Manufacturing

Manager Distribution

Each level of the organization should be working together in the creation of the budget. Each level within the organization should be able to contribute as it can by working together to come up with a budget.

Lower management is responsible to set the estimates for budgetary data within an open system. They then submit the budget to the next stage of the management. Prior to the budget being approved, it must be reviewed and analyzed by the middle management prior to when they are passed on to the company.

Benefits of budgeting with participation

Participatory budgeting is beneficial to everyone involved in a project. It helps make sure that all participants contribute ideas to build a successful project.

Budget information is presented clearly and reasonably accurate due to the making use of the information that is available at the project management level

Motivation to work is greater when the employee is directly participating in setting goals, rather than goals that are imposed from above. Budgets that were self-imposed made promises to achieve the objectives.

If the budget was established by the top management, the managers may declare that the budget is unjust or insufficient, to begin with, or cannot be executed. Participative budgeting doesn’t happen when management decides to set its own budget.

The disadvantages of a participative budget

It is time-consuming and expensive due to there being too many people engaged in the budgeting projects.

The power of the top manager has a limited influence on the budgeting process. But, when lower managers design the budgets for the short and mid-range budgets, laying out the organizational goals and policies they may influence the results by releasing an announcement.

People tend to underestimate the actual resource requirements since they believe that the entire budget will be cut by an amount by the top management and set a target lower than actual to reach the goal.

2. Budget Variance

a. Definition of variance in the budget:

The variance in the total budget is the gap between the actual cost of an input and the estimated cost.

The total variance is Price variance x Usage variance

In the standard costing system it is split into usage and price variation.

Price variance refers to the variation between the real and standard price for an input multiplied by the number of units used.

Variance in usage is the variation between the number of inputs that are actually and the number of inputs multiplied with the unit price standard for the input.

Total variance is (AP x the AQ) (AP x AQ) (SP SQ)

Actual COST

(AQ x (AQ x)

STANDARD COST

(SQ + SP)

STANDARD COST

(SQ + SP)

The actual cost

(AQ x (AQ x)

<

>

AFFORDABLE VARIANCE

(ACTUAL < STANDARD)

UNFAVORABLE VARIANCE

(ACTUAL > STANDARD)

The word “AQ” means the amount of input that is required to produce the output

AP refers to the actual cost of the inputs for the production of the output

SQ is the term used to describe the quantity that is standard.

SP refers to the standard price.

Variances that are favorable and unfavorable do not mean the same thing as a good or bad variance. These terms define the relation of the price or the quantity to standard price and quantity.

b. Investigation into budget variances

Manager’s responsibility is to calculate the variance as it is a crucial element of efficient control of the company. It is generally difficult to manage external causes for budgetary variance (government policies, the market fluctuations, exchange rates aEUR|) as opposed to internally generated sources (raw material cost per hour, direct labor). …). Management must be aware of the acceptable performance range.

If the budget is in a positive balance, it means it brought in profits to the business. Investigating to discover what caused the budget variance was advantageous and that it might be more favorable in the near future.

If the variance is not too significant the issue should not be too concerned. In reality, a tiny deviation between budget figures and projected numbers is often the case. If there is a small gap it is possible for the manager to ignore these issues, and there is no need to make a strong move because it will not have huge negative consequences to the company. With little or no difference the most effective way to resolve the problem is to put it back in its place.

If the budget is in unfavorable deviation, the department heads need to do an investigation to figure out the root causes through external or internal influences. As an example, the rise in raw material consumption per unit is higher than norms due to an issue with the machine’s condition or manufacturing defect. Find out the reason and the best way to correct the issue This is a sensible step to avoid another similar scenario from occurring later on. If there is an adverse variance, the budget should be revised or the budget must confirm the budget through an internal audit.

Question 3

The term that is used in the sentence.

1. Fixed costs committed to the company

Fixed costs are committed to the expenditure on facilities, equipment, and the basic structure of an organization. The two major characteristics of fixed cost commitments are that they’re long-term in nature, and can’t be reduced significantly for short time periods without affecting the profitability or long-future goals of the business. Even if operations are disrupted or reduced or halted, the fixed costs committed will remain largely the same (Garrison and co. 2006. P190). For instance: Vietnam airlines has a total of 80 aircraft. The company is required to cover maintenance, depreciation, and insurance costs. The cost is not based on the frequency the plane flies or the number of passengers on the plane. It is a fixed, committed cost.

The decision to purchase major equipment or other fixed expenses that are not committed requires an extended planning time. Management should take such decisions only after careful analysis of alternatives. When a decision is taken to obtain committed resources the business could be enticed to stick with the decision for a long time to follow (Garrison and co. 2006 P191). For example, the total committed fixed cost of letting the building in the case of the hotel is extremely expensive and the company has to agree to fund it at least five times over the course of five years. Vietnam.

Uneven revenue flow

It’s been proven that the different levels of the demand (low as well as high) for a product or service at different times. At certain times, the company is very busy while at other times it is afflicted by extremely slow times. It is usually separated into two distinct periods the high season and the low season. The time period between the two seasons is able to shift and shift each year. In peak season, the hotel may not have enough space for guests and the price of rooms is extremely high, which generates huge profits for the hotel. However, during the low season, the hotel has to lower its prices and implement promotions to draw in tourists. This is a typical situation of resorts and hotels.

The implications of the above scenario for the company

“Many of our expenses are fixed costs that are committed. Our revenue flows are very in a varying manner. In order to be successful, we need to adopt a flexible approach to pricing”

The hospitality sector has a significant portion of fixed costs for the initial investment, so the break-even point is extremely high. The company can operate at a the highest capacity prior to realizing profits. However, once the break-even point , the profit will grow quickly.

Fixed cost committed has minimal impact on the amount of expenses in the short-term. Revenue is the amount of money a business receives when selling their item or offering. It is determined by taking the price of sale and multiplying it by the amount of sales. Profit is the sum of money that remains after the cost has been paid for. It is determined by total revenue less total cost. So, profits won’t be increased by placing more concentration on managing expenses. The company can earn a profits if revenues are maintained at a constant level above break-even level. Because of the nature of the leisure industry the product isn’t in storage , therefore focusing on revenue in the time of low demand is the main goal for this company.

In adopting a flexible strategy, the business is able to adjust the cost of its product or service to fit the specific needs of the company and the amount customers are willing to spend. The price that is set should be more than variable cost and must be above the break-point. This pricing strategy was designed to draw in as many customers as is possible when the business has capacity spare. The price will increase during times of high demand where the business can be expected to run at close to 100% capacity.

For instance, in Vietnam, Da Nang has an extensive coastline. Seaside hotels are in high demand during the summertime (from May through August) and this is mainly for domestic travelers. Room rates are typically more expensive by two times as the normal. Hotels earn the most during this time. In the lower season, which runs between October and February of next season, hotels offered promotions to draw tourists such as a discount 30% room rates for Furama Resort or stay 2 nights for gratis for Golden Sand Resort. In this instance, it is periods of low volumes, they have an unflexible, cost-focused method of pricing is used.

Translate »
Need Help? Chat with us