Assignment 1: Discussion—Cost Types It is first thing Monday morning and your bo
ID: 2579693 • Letter: A
Question
Assignment 1: Discussion—Cost Types It is first thing Monday morning and your boss requested your presence ASAP. As you go to your meeting without even getting a second cup of coffee, you ponder the objective of the meeting. You believe it must have something to do with the fact that your visit to Harmony Organs has been moved up. There is a lot of pressure to cut costs and Linda Kaye wants to continue with the next step. Mickelle Bride, the CEO of Harmony Organs, is often called the ear of the company. She has been able to craft pipes with overtones and harmonics that would make Stradivarius cry. Linda Kaye would like you to explain to Mickelle the importance of understanding the different cost types (fixed cost, variable cost, and semi-variable cost) when undertaking cost-cutting measures. Also use an example to explain to her the importance of cost estimation. Mickelle is very good at math so she will be interested in the accuracy of visual fit, high-low, or least-squares regression.
Explanation / Answer
Answer:
Fixed Cost
A fixed cost is one that does not change in total within a reasonable range of activity. For example, the rent for a production facility is a fixed cost if the rent will not change when there are reasonable changes in the amount of output or input. (Of course, if there is a need to double the output the rent will change when the company occupies additional work space.)
for example: Rent, Electricity Bill, Permanent Labour charges etc.
For Deceision Making this cost is irrelevent because it is continue to occure irrespective of deceision taken or not.
Lets Understand by one eample a company take a building on rent of $5000 p.m. now company will have to pay rent p.m as given above whtether company is doing business or not
Variable Cost:
Variable costs are expenses that fluctuate proportionally with the quantity of output. Variable costs are directly tied to the activities of producing volume, which rises when these activities increase and falls when activities decrease. This effect can be related to materials, labor, and sales commissions. For example, if you produce spark plugs, the copper used in production is a variable cost. This means if you stop producing spark plugs, you would no longer have the cost of copper. Additionally, regardless of how many spark plugs you produce, the price of copper for one spark plug remains unchanged.
Example: raw material cost, Labour charges etc.
It has direct relation with business if company will reduce the production then the variable cost will be reduce accordingly.
Let take a example: comany buying raw matreria @ of $15/unit now if comany will produce then it has to incurred $15 per unit as raw material expenses if comamny will stop production then it will save this amount.
Semi Varable Cost:
1. Cost per batch remain constant
2. Total cost will increase as number of batches increase
3. In other words we can say batch wise variable and within the batch fixed but its not possible to segregate fixed portion and variable portion seprately.
4. If lot size increses then total number of lot will decrease which means total cost also reduces but cost per lot remain constant and this manipulation would be appliaed only in case of inspection/supervision charges bjut not for the hire charges of the bus or the parking charges for a bus.
For example:
Unit Cost
0-100 2000
101-200 4000
201-300 6000
301-400 8000
401- 500 10000
501-600 12000
if lot size =200 units
No. of student = 600
No. of lot =600/200 = 3
cost per lot = 2000
total Cost = 2000*3 = 6000