Absorption vs Variable Costing
Semi Variable Costs
Average CostVariable vs Fixed CostDefine Fixed and Variable Costs
In accounting, a distinction is often made between variable costs
and fixed costs
. Variable costs change with activity or production volume. Fixed costs remain constant regardless of activity or production volume.
In accounting, all costs can be described as either fixed costs or variable costs. Variable costs are inventoriable costs – they are allocated to units of production and recorded in inventory accounts, such as cost of goods sold. Fixed costs, on the other hand, are all costs that are not inventoriable costs. All costs that do not fluctuate directly with production volume are fixed costs. Fixed costs include indirect costs and manufacturing overhead
When comparing fixed costs to variable costs, or when trying to determine whether a cost is fixed or variable, simply ask whether or not the particular cost would change if the company stopped its production or primary business activities. If the company would continue to incur the cost, it is a fixed cost. If the company would no longer incur the cost, then it is most likely a variable cost. Variable Cost, Fixed Cost – Examples
For example, if a telephone company charges a per-minute rate, then that would be a variable cost. A twenty minute phone call would cost more than a ten minute phone call. A good example of a fixed cost is rent. If a company rents a warehouse, it must pay rent for the warehouse whether it is full of inventory or completely vacant.
Other examples of fixed costs include executives’ salaries, interest expenses
, and insurance expenses. Examples of variable costs include direct labor
and direct materials
costs. Fixed and Variable Costs and Decision-Making
When making production-related decisions, should managers consider fixed costs or only variable costs? Generally speaking, variable costs are more relevant to production decisions than fixed costs.
For example, if a manager is deciding between keeping production levels constant or increasing production, the primary factors in this decision will be the variable or incremental costs of the production of additional units of output, and not the fixed costs related to the operations that cannot be altered and will not change with the level of production. Therefore, in most straightforward instances, fixed costs are not relevant for production decision, and incremental costs, or variable costs, are relevant for these decisions.