The characteristics of fixed and variable costs : Fixed Costs change with respect to Volume or Activity. Some costs vary directly in proportionate to changes in the volume of output, while others remain more or less fixed in amount. Unless a cost system shows necessary concern to this issue, costs accumulated and reported for planning the organization’s strategy or for costing individual products or services will not be of material impact to the management.
Direct materials and direct labor are normally listed under the variable costs section. Factory overhead and non manufacturing costs should be well examined with regard to items of a fixed and variable costs in nature. It is difficult to budget and control these costs smoothly without regard to their tendency to be fixed or variable; the division is a prerequisite to proper budgeting and intelligent proper cost planning and analysis.
The noted characteristics of fixed and variable costs are as follows:
Characteristics of fixed costs :
(1) fixed amount within a relevant range
(2) decrease of fixed cost per unit with increased output
(3) assignment to departments often made by arbitrary managerial decision or costs allocation methods and
(4) control for incurrence in most cases rests with executive management rather than operating supervisors .
Characteristics of variable costs :
(1) variability of total amount in direct proportion to volume;
(2) comparatively constant cost per unit in the face of changing volume ;
(3) easy and reasonably accurate assignments to operating departments; and (4) control of their incurrence and consumption by the responsible department head.
Defining the characteristics of fixed and variable costs will be resting upon management decision. For example , management many decide to (1) rent a bus at a rate per mile driven (a variable cost) or (2) buy a bus and depreciate it by straight-line method of depreciation (a fixed cost).
Some factory overheads are semi-variable in nature, containing both fixed and variable portions. A semi-variable cost is often characterized by a fixed dollar element below which it will not fall at all relevant levels of production.
The variable element changes at a constant amount per unit of output. Electricity cost, might be used to provide lighting for the the plant as well as the power to operate the equipment. The electricity consumed for lighting may be a fixed cost because if the plant is in use, the building will be lighted regardless of the levels of production.
Conversely, electricity used to operate the equipment will vary depending on how much consumption is made for the equipment. More than defining the characteristics of fixed and variable costs, it is essential to capture the costs for future analysis.