Free Essay On Fixed And Variable Costs
Judy Koch meant that nowadays it is hard to see a cost that is either fully fixed or entirely variable. Most of the costs today are semi-variable costs. A variable cost changes relative to the changes in the activity been carried out (AT, 2015). In organizations, these activities are usually the volume of production or the volume of sales. The materials used in the production of products are regarded as variable costs because their quantity is determined by the number of units produced. Examples of variable costs include direct materials; production suppliers; piece rate labor; commissions; billable staff wages; freight out; and credit card fees that are charged on the sales made (AT, 2015).
Fixed costs do not change with the increase in the production volume. Fixed costs are also known as sunk costs because they have to be paid irrespective of the number of units produced by the company (VC, 2015). Examples of fixed costs include insurance; rent; and leasing fees. Many companies strive to reduce their fixed costs by introducing new activities or services that generate revenue. A good example is the gas station introduction of convenience stores. The gas station is able to generate more revenue by selling items in the convenience store as opposed to only relying on the sale of gas. The fixed cost will remain the same, but the revenue will be higher than the fixed cost.
Semi-variable costs are those costs that contain the elements of both variable costs and fixed costs (AT, 2015). The variable part of the cost will be incurred relative to the volume of production while the fixed part of the cost will be incurred periodically. Most products contain both variable costs and fixed costs.
AT, (2015). What are Examples of Variable Costs. Accounting Tools. Retrieved from: http://www.accountingtools.com/questions-and-answers/what-are-examples-of-variable-costs.html
VC, (2015). The Difference Between Fixed Cost and Variable Cost. Variable Cost. Retrieved from: http://www.variablecost.net/Difference-Between-Fixed-Cost-and-Variable-Cost.html