A variable cost is a corporate expense that changes in proportion to production output. Do you find it confusing on how to classify costs among direct cost, variable cost, fixed cost and indirect cost? Explain variable costs and fixed costs [EXERCISE] B tl H it l t t ti t th t f h ti t t It i l h lth Butler Hospital wants toestimate the cost for each patient stay. A common example of a variable overhead cost is the electricity used to operate factory equipment. This preview shows page 11 - 19 out of 32 pages.. Variable/semi-fixed expenses. It is essential to understand that direct fixed cost is incurred on the core product or the service which is being provided to the customer, and this cost should not increase if the activity level is increased or decreased. A common example of fixed cost is rent. During the first year or so of startup, your business income may be low as you build up your customers. The concept is used to model the future expenditure levels of a business, as well as to determine the lowest possible price at which a product should be sold. Learn vocabulary, terms, and more with flashcards, games, and other study tools. 10) Depreciation, factory building (b) fixed cost. QUIZ QUESTION 2 -15 QUIZ QUESTION Further, Fixed costs may be classified as Direct Fixed cost or Indirect Fixed cost. Electricity consumption charge of a factory where surgical equipment is produced would increase with the increase in the activity level. Examples of fixed costs would be the rent of an office or factory, or wages for staff who are paid a salary rather than per hour worked. In this way, a company may achieve economies of scale by increasing production and lowering costs. Isn't all overhead fixed? If you had no sales revenue, you’d have no variable expenses and your semifixed expenses would be lower. The more time a developer will spend coding a particular program, the higher will be salary recharge to that project. Similarly, the sum of all variable costs and all fixed costs also equals to Total Costs. Let’s take the example of a football stadium which conducts football matches and tickets are sold online through a ticketing partner. With significant growth in industrialization, it might be challenging to find out what is the correct classification of a particular cost. Let’s take an example of a manufacturing unit which produces textiles in a rented building. Total variable overhead may be calculated as the product of estimated variable cost per unit (also called variable overhead rate) and the budgeted production units (obtained from production budget). However, the product's indirect manufacturing costs are likely a combination of fixed costs and variable … As a general rule of thumb, any expenses which are incurred in the production plant will be considered as direct expenses (or direct cost). Thus, the cost of registration of patent of a new formula or design or a model for a pharmaceutical company or an automobile company would be considered as Direct Fixed cost. There is a fixed portion that must be paid regardless of business volume, and also a variable portion that does change when sales volume changes. Explain variable costs and fixed costs 2 -12. LEARNING OBJECTIVE 3. Factory overhead is any manufacturing cost that is not direct materials or direct labor. If the number of units produced doubles, then variable production costs will double also. Now, this cost is another example of an indirect variable cost. The salaries of this IT team would not increase due to the higher number of orders in a month than another. This cost would remain the same even if more or fewer units are produced. The registration cost of this patent is directly related to the manufacturing of this medicine. In the healthcare segment, where doctors are employed at a fixed monthly salary, the salaries of such doctors will be considered as a direct fixed cost. Similarly, if more services are provided, these expenses will increase, and if fewer services are provided, these expenses will decrease. Manufacturing costs consist of four basic types: Raw materials (also called direct materials): What a manufacturer buys from other companies to use in the […] A direct fixed cost is a cost which is directly related to the production process or service delivery but does not vary as per activity level. The electricity bill can be divided into two parts – (1) line rent and (2) … All Variable costs + All Fixed Costs = Total Costs. Outside the upper range limit, additional fixed costs may be incurred. c. Wood used in furniture production. Fixed costs remain constant.
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