Week 3 - Discussion 1 Fixed versus Flexible/Variable Expenses ✓ Solved

Evaluate how fixed and variable costs can differ based upon the industry. Which would you prefer to have more of in terms of expenses (fixed or flexible)? Provide rationale for your choice. Your initial post should be at least 300 words.

Resources Readings

  • Textbook: Dropkin, M., Halpin, J., & LaTouche, B. (2007). The budget-building book for nonprofits (2nd ed.). Jossey-Bass. Chapter 14: Major Components of Operating Budgets

  • Article: Chevarley, F., Owens, P.L., Zodet, M.W., Simpson, L., et al. (2006). Health care for children and youth in the United States: Annual report on patterns of coverage, utilization, quality, and expenditures by a county level of urban influence. Ambulatory Pediatrics, 6 (5), 241-64.

  • Videos McCarthy, J., [goldstarjimmccarthy]. (2010, September 1). Difference Between Fixed and Variable Costs - Quick Draw with Jim McCarthy, Goldstar CEO [Video File]. Retrieved from (Links to an external site.) BPMSG, [BPMSG]. (2010, February 23). 06 Operating Expenses Fixed and Variable (Business Performance Management) [Video File]. Retrieved from

Paper For Above Instructions

In operating any business or organization, the distinction between fixed and variable costs is crucial. Fixed costs are those expenses that do not change with the level of output; they remain constant regardless of how much a company produces. These typically include rent, salaries, and insurance. Conversely, variable costs fluctuate directly with production volume. These can include raw materials, utility bills that vary with usage, and sales commissions. Understanding these cost structures is essential as they can greatly differ from one industry to another, influencing overall budgeting and financial strategy.

In the manufacturing sector, for example, fixed costs may include machinery payments and factory lease agreements that remain consistent over time. However, as production increases, variable costs, such as raw materials and labor necessary to meet demand, can escalate. On the other hand, in service industries like consulting or education, fixed costs may be less pronounced since services can often be rendered without substantial infrastructure; expenses are mainly tied to labor costs, classified as variable expenses. The healthcare industry also offers a nuanced perspective; it often comprises both fixed expenses, like salaries for support staff, and variable costs tied to patient care, such as medical supplies and overtime pay depending on patient inflows.

Preference for fixed or variable expenses often depends on the specific goals and operational strategies of an organization. For businesses looking to stabilize their earnings despite fluctuations in production or sales, a higher proportion of fixed costs might be preferable. This arrangement can help mitigate risk as the larger fixed-cost base can lead to higher margins once a break-even point is surpassed. However, a company that values flexibility and adaptability, especially in a volatile market, might opt for more variable costs that can be adjusted according to changes in demand.

Personally, I would prefer to have more variable expenses rather than fixed expenses. The rationale behind this choice is rooted in the agility that variable costs provide in response to market dynamics. In challenging economic climates, organizations can reduce variable expenses more quickly than they could fixed expenses. For instance, during downturns, a company reliant on fixed costs may face significant financial strain, while a company with predominantly variable costs can simply scale back operations without incurring the same level of risk. Additionally, having a flexible cost structure allows for easier experimentation and pivoting, as businesses can quickly adapt offerings and allocate resources as needed.

Moreover, variable costs are often directly tied to productivity levels, meaning that as revenues increase, spending on variable costs may naturally rise in a proportionate manner, reflecting a successful economic model. This can create a more balanced approach to budgeting where financial commitments evolve with performance rather than imposing a rigid, unwavering cost structure. However, the decision between fixed and variable costs is not to be taken lightly; both have their advantages and must be strategically assessed in relation to industry demands, organizational goals, and economic conditions.

In conclusion, the choice between fixed and variable expenses hinges on specific industry characteristics and the fiscal health desired by an organization. While fixed expenses provide stability and predictability, the flexibility afforded by variable expenses often allows for a quick response to market exigencies, making it a more attractive option for many contemporary businesses.

References

  • Chevarley, F., Owens, P.L., Zodet, M.W., Simpson, L. et al. (2006). Health care for children and youth in the United States: Annual report on patterns of coverage, utilization, quality, and expenditures by a county level of urban influence. Ambulatory Pediatrics, 6(5), 241-64.

  • Dropkin, M., Halpin, J., & LaTouche, B. (2007). The budget-building book for nonprofits (2nd ed.). San Francisco: Jossey-Bass.

  • McCarthy, J., [goldstarjimmccarthy]. (2010, September 1). Difference Between Fixed and Variable Costs - Quick Draw with Jim McCarthy, Goldstar CEO [Video File]. Retrieved from [URL].

  • BPMSG, [BPMSG]. (2010, February 23). 06 Operating Expenses Fixed and Variable (Business Performance Management) [Video File]. Retrieved from [URL].

  • Harvard Business Review. (2019). Budgets: How to Manage Fixed and Variable Costs Effectively. Retrieved from [URL].

  • Brigham, E. F., & Daves, P. R. (2016). Intermediate Financial Management. Cengage Learning.

  • Kaplan, R. S., & Norton, D. P. (2001). The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Harvard Business School Press.

  • Drury, C. (2013). Management and Cost Accounting. Cengage Learning EMEA.

  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.

  • O'Guin, K. R. (2016). A Comprehensive Guide to Nonprofit Budgeting. Nonprofit Quarterly. Retrieved from [URL].