In management accounting, cost management has a crucial role and finds its foundations in understanding “cost behaviour”. “Cost behaviour analysis” can be defined as “the study of how cost changes when there is a change in an organisation’s level of activity”. (Definition https://www.accountingcoach.com/blog/what-is-cost-behavior).
Managers need to analyse the behaviour of three different types of costs:
- Fixed costs;
- Variable costs;
- Semi- Variable (or mixed) costs.
A “Fixed cost” can be defined as “a cost that does not change with an increase or decrease in the amount of goods or services produced or sold”. It is time related.
(Definition http://www.investopedia.com/terms/f/fixedcost.asp).
“Fixed costs remain constant as they are not
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The term “fixed” refers only to the fact that this cost does not change based on the volume. However, it does not mean that it is static and constant forever, but only for a relevant range of volume.
“For example, if the organisation decide to expand, fixed costs will definitely increase. Sometimes, organisations decide to reduce certain fixed costs to improve their cash flow, by moving to a less expensive workplace or reducing the number of employees”.
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Additionally, there are semi –variable (or mixed) costs. A “semi-variable cost” is a “cost that has both fixed and variable components. This cost is fixed for a set amount of produced products or sold services and becomes variable after this amount of production/sales is exceeded. If no production occurs, the fixed component still occurs”. (Definition http://www.investopedia.com/terms/s/semivariablecost.asp).
Perfect example of semi-variable cost are the utilities, that are determined by a monthly flat rate as per contract and an overage charge based on usage. A semi variable cost with lower fixed component is favourable for the organisation as it requires a lower break-even point.
The terms variable and fixed costs related to a hotel are used to distinguish between those costs that have or do not have a direct relationship to occupancy.
Considering my specific area of work (Room Division),
- examples of fixed costs are: annual salaries (i.e. Director of Rooms’ salary, paid irrespective of the number of hours worked), yearly external auditing cost, licenses and permits, training cost, out-sourced services contracted for a monthly fixed
Fixed expenses are those that will be there everyday the lodge is open regardless of the number of skiers. The Lodge is open 200 days per year and the cost of running the new lift is $500 per day for the entire 200 days giving us $100,000 in fixed costs. Variable costs are the expenses based on the number of customers. There is an additional $5 expense per skier per day associated with the new lift. If there are 300 skiers multiplied by $5 each multiplied by the 40 days that they are expected to be on the lift, we will have $60,000 in variable expenses.
Cost management plays a major role when maintaining profit margins. Management must be able to find in which areas of a business costs must be reduced and the consequences that such reductions have in the overall company. In some situations management must change the way the work is being done in order to decrease costs while in other cases changing one supplier for another might be enough, in both situations a tradeoff will occur and the consequences will impact the company as a whole.
Variable costs, for a manufacturing company, are those costs that increase or decrease as production increases or decreases. If production increases, then variable costs will increase; if production decreases, variable costs will decrease. For Claire’s Antiques, examples of their variable costs would be manufacturing labor, raw materials, and manufacturing overhead. Examples of manufacturing overhead would be the utilities that are used in the production facility, and the oils and lubricants used in the machinery. Fixed costs in a manufacturing company are those costs that remain constant regardless of the level of production. Examples of fixed costs for Claire’s Antiques are: sales and administrative costs, rent and/or mortgage on the production facility, and depreciation. Semi-variable, or mixed, costs are costs that have both fixed and variable costs. An example of a semi-variable cost could be if Claire’s leases their delivery trucks, and the lease includes a mileage fee. The monthly lease would be considered a fixed costs, but the mileage fee would be a variable cost. (Hofstrand, 2007). In most cases, fixed costs are usually higher than variable costs, and can absorb a great deal of profits. Because of this, some companies may consider converting their fixed costs to variable costs.
1) Total Variable Costs are 60% of Total Costs; While the other 40% are from fixed costs.
Fixed cost is high for the container shipping industry such as vessel fees, container fees, and labor of loading and unloading. Variable cost is fuel cost, because the volatility of fuel price, so there is a potential huge impact on industry’s profit.
For instance, ABC might identify a distribution channel as non-remunerative or non-value adding. Such channeling might however be non-profitable, but aid in achieving some other strategic objectives. Conclusively, the review of activity based costing benefits and shortcomings suggests that although ABC has many uses and has aided in renovating many firms, the establishment of lean accounting methods such as Economic Value Added and Balanced Scorecards that focus on eradicating cost allocations and permit thorough accounting, measurement and control systems, has made activity based costing tend to become obsolete. However, ABC still has many supporters, notably in some business-intelligence software applications and the US Marine
? Netflix enjoys lower fixed costs due to the fact that it is an online DVD rental company. As an internet business, Netflix incurs less overhead costs than competitors such as Blockbuster, as well as having fewer employees to operate the physical locations, thus labor costs are greatly reduced.
Variable costs: “Variable costs are costs that vary with the volume of activity”2 and they are: direct labor, Materials, Material spoilage & direct department expenses.
Even though a myriad of tools and techniques learnt in the Strategic Cost Management and Strategic Business Analysis courses are not fully exploited in this essay, it is generally recognised that those techniques are useful for a corporate to formulate strategy, do strategic planning, control costing and quality, as well as eventually elevate its values, regardless the nature and size of organizations.
Total cost is all of the expenses incurred in the production of a product, to include fixed and variable costs. Fixed costs, are expenses that are constant and do not change from month to month regardless of the amount of products sold. For instance, the rent of the factory is considered a fixed cost, for the reason that, the rent must be paid whether products are produced and sold or not. Variable costs,
Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.
The first way is achieving a high turnover in service for example a restaurant that turns tables around very quickly, or an airline that turns around flights very fast. This approach means fixed costs are spread over a larger number of units of the product or service. This will result in a lower unit cost. Large businesses do this to create an entry barrier to prevent potential competitors from competing with their product. As they are unable to match the scale necessary to match the large firms low costs and prices.
Activity-Based Costing ( ABC ) Summary The business environment in the 1990s is markedly different from that of the past when conventional cost accounting procedures were established. Activity-based costing (ABC), pioneered in the late 1980s, offered a new costing approach consistent with the changed environment. However, ABC did not diffuse rapidly into the business community.
...pplied. Cost estimation and analysis could ultimately determine major decisions in both the business and political worlds today, and play a crucial role even in our day to day lives. Through activity based costing one is able to see what areas need improvement and also whether or not a business will be successful after considering all the factors. These tools are very powerful in drawing wise conclusions from cost analysis and can be a priceless tool to have even in the field of engineering.
That is, the size of labor may decrease or increase but the capital and other inputs will remain fixed. If the firm Suffers losses at its best level of output then, the business should try to reduce its marginal cost and function at the level where average and marginal product are positive or cumulative. If price drops below ATC, but relics above average adjustable cost, the company will continue to function in the short run, crafting the capacity where  MR = MC doing so reduces its losses. Whereas if price falls below average variable cost, the company will go out of business in the short run, dropping output to zero. The lowest point on the average variable cost curve is called the shutdown