fixed cost vs variable cost

8/7/2019 Fixed Cost vs Variable Cost

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Concept


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FixedCost

Variablecost

Total

cost


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Unit fixed costs, called average fixed costs (AFC),decline with volume

Example: Rent

Fixed

Variable costs by contrast change in relation to theactivity of a business

Example: Supplies

Variable


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Points Fixed Costs Variable Costs

Units produced Do not change with changes inunits produced

Change with every unit changein production

Basis Based on passage of time(Annual, Monthly etc.)

Based on number of unitsproduced

Control by Management Beyond management controlin the short-term

Can be controlled bymanagement by changing

production levelsVariability Variable in the long term Variable in both short term &long term

Examples ent, Mortgage Payments etc. aw Material Cost, Electricityetc.


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Committed Fixed Costs:

Fixed costs caused by purchase of capacity producing assets such as

plant and equipment are called committed costs. Company has committed itself to incur such costs my making long

range decisions which will extend several years into the future.

E.g.:Depreciation, rent, insurance, etc

Discretionary Fixed Costs:

These are also known as programmed costs or managed costs.

Costs caused by management policy decisions to undertakeactivities like R&D, advertising, etc are called discretionary fixedcosts.


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SC NARIO 1

Fixed cost = 500

Unit Variable Cost= 10 Items sold= 100@ 50

Sales=5000

Variable cost= 1000

Total cost= 1500

rofit= 3500

Unit Profit=35

SC NARIO 2

Fixed cost = 500

Unit Variable Cost= 10 Items sold= 200@ 50

Sales=10,000

Variable cost= 2000

Total cost= 2500

rofit= 7500

Unit Profit=37.5

Sales

Increases

Unit fixed

Cost Reduces

UnitProfit

Increase


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Case Study


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TheDK izza House has provided withthe following information :

Costs

Monthly sales


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Monthly sales units 3,000 6,000 9,000

Cost of food 35000 50000 60000

Supplies 6000 12000 18000

Salaries 8000 14000 20000

Utilities 3600 4200 4800

Other operating costs 15000 30000 45000

Advertising and promotion 4000 4000 4000

Telephone 3000 5000 7000

Electricity 4000 6000 8000

Repairs and Maintenance 1000 1200 1400

Vehicle Rent 2000 4000 6000

Fuel 1000 2000 3000

Building rent 10000 10000 10000

Insurance (prepaid) 5000 5000 5000

Depreciation 2000 2000 2000


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Identify each cost as variable, fixed or

mixed1

Identify the committed and discretionaryfixed costs; suggest which of these couldbe cut down in case of slow down/pricewar from competition.

2


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Monthly sales units 3,000 6,000 9,000

Cost of food 35000 50000 65000

Supplies 6000 12000 18000

Utilities 3600 4200 4800

Other operating costs 15000 30000 45000

Building rent 10000 10000 10000

Depreciation 2000 2000 2000

Develop an equation to estimate total cost at various levelsof activity given that only following costs are considered:3


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Pr j ct t tal c st it t ly sal s f8, its c si ri t c sts i (3)

ly.4

If a r al Pizza s lls at Rs. 5 / pizza,calc lat its c trib ti ar i p r it if3 pizzas ar s l c si ri c sts i (3)

ly.

5


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Case Solution


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y = 1500x + 2000

0

1000

2000

3000

4000

5000

6000

7000

3000 6000 9000

Cost of Food


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y = 600x

0

200

400600

00

1000

1200

14001600

1 00

2000

3000 6000 9000

Supplies


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y = 60x + 300

0

100

200

300

00

500

600

3000 6000 9000

Utilities


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y = 1500x

0

500

10001500

2000

2500

3000

35004000

4500

5000

3000 6000 9000

Operating Cost


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y = 1000

0

200

400

600

800

1000

1200

3000 6000 9000

Rent


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y = 200

0

50

100

150

200

250

3000 6000 9000

Depreciation


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Monthl s l s nitsFix d V ri bl B h viour

Cost of food 20000 15000 Mixed

Suppli s 0 6000 Variable

Salari s 2000 6000 Mixed

Utiliti s 3000 600 MixedOth r op rating costs 0 15000 Variable

Adv rtising and promotion (discr tionar ) 4000 0 Fixed

T l phone 1000 2000 Mixed

Electricit 2000 2000 Mixed

Re

pa

irsan

dMa

in

tenan

ce

(co

mmitte

d) 1000 0 FixedVehicle Rent 0 2000 Variable

Fuel 0 1000 Variable

Building rent (committed) 10000 0 Fixed

ConsultingServices (discretionar ) 2500 0 Fixed

Insurance (prepaid) (committed) 5000 0 Fixed

Depreciation (committed) 2000 0 Fixed


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Sales Total Costs

9,000 14,4 0

3,000 7,160

6,000 7,320


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Monthly sales units 8,000

Cost of food sold 6,000

Supplies 1,600

Utilities 460Other operation costs 4,000

Building rent 1,000

Depreciation 00

Total 13,260


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Variable C. ./unit =

49600/3000 =

Rs. 16.53

S. . / unit =

Rs. 50

Contribution margin / unit =

S. . Variable C. .=

Rs. 33.47


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fixed cost vs variable cost

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