We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

Managing fixed and variable costs in a business Essay Sample

essay

Get Full Essay

Get access to this section to get all help you need with your essay and educational issues.

Get Access

Introduction of TOPIC

Explain the fixed and variable costs in relation to the organization

In management accounting, cost management has a crucial role and finds its foundations in understanding “cost behavior”. “Cost behavior analysis” can be defined as “the study of how cost changes when there is a change in an organization’s level of activity”.
Managers need to analyze the behavior of three different types of costs:
– Fixed costs;
– Variable costs;
– Semi-Variable (or mixed) costs.

A “Fixed cost” can be defined as “a cost that does not change with an increase or decrease in the number of goods or services produced or sold”. It is time-related.

“Fixed costs remain constant as they are not affected by the changes in the activity. It does not make a difference if the organization is producing/selling or not. Fixed costs will still be paid. Example of fixed costs can be: Rent for the space the organization occupies, Insurances, Property taxes, Depreciation of Assets. This cost is not static and constant forever, but it does not change for a relevant range of volume. For example, if the organization decided to expand, fixed costs will definitely increase. On the other hand, if the organizations reduce the number of employees or use a less expensive workplace, the fixed costs decrease and the cash flow improves.

A “variable cost” can be defined as “a cost that does vary depending on the organization’s amount of goods produced or services sold”.
Therefore, if there is an increase in production/sales, the variable cost will increase and in the same way, if there is no production/sales, there will be no variable cost. This cost changes in total, but it remains the same per unit. Example of variable costs can be: Direct material costs, like packaging costs that will proportionally change based on the number of units produced;
Management t

ends to manipulate the production/sales to change the variable costs. Additionally, there are

Sorry, but full essay samples are available only for registered users

Choose a Membership Plan
semi-variable (or mixed) costs. A “semi-variable cost” is a “cost that has both fixed and variable components. This cost is fixed for a set amount of produced products or sold services and becomes variable after this amount of production/sales is exceeded. If no production occurs, the fixed component still occurs”.  A perfect example of semi-variable cost are the utilities, that are determined by a monthly flat rate as per contract and an overage charge based on usage. A semi-variable cost with the lower fixed component is favorable for the organization as it requires a lower break-even point. The terms variable and fixed costs related to a hotel are used to distinguish between those costs that have or do not have a direct relationship to occupancy.

Considering my specific area of work (Room Division),
– examples of fixed costs are: annual salaries (i.e. Director of Rooms’ salary, paid irrespective of the number of hours worked), yearly external auditing cost, licenses and permits, training cost, out-sourced services contracted for a monthly fixed amount;
– examples of variable costs are: guest supplies, cleaning supplies, complimentary services, and gifts;
– example of semi-variable costs: Energy, House Telecommunication.
The example below clearly demonstrates fixed, variable and semi-variable costs’ behavior within the room department. It enables to establish the Guest Supplies cost for August (having a forecast of 4200 room nights sold) by considering the recorded ones for June and July.

June July August Formulas and Examples
Room nights sold 2,200 3,800 4,200
Guest Supplies
(Variable Cost) 14,960 25,840 28,560 Total cost (14,960) ÷ Total room nights sold (2200) = Variable Cost per room night (6.80)
Therefore, Variable Cost pr (6.80) x Total Room nights (4200) = Total cost £28,560
Variable cost increases proportionally to the increase of Sales Volume
Room Division Director Salary (Fixed Cost) 6,000 6,000 6,000 It remains the same as not affected by the change in Sales Volume
Energy
(Semi-variable cost) 4,000 5,000 5,250 The Highest Semi-Variable Cost(5,000)-The Lowest Semi-Variable Cost (4,000) = Cost Increase (1,000)
The Highest Room nights (3,800) – The Lowest Room nights (2,200) = Room nights Increase (1,600)
Cost Increase (1,000) ÷ Room nights Increase (1,600) = Variable Cost per room night (0.625)
Variable Cost pr (0.625) x The Lowest room nights (2,200)= The Lowest Total Variable cost (1,375)
The Lowest Total semi-variable cost (4,000) – The Lowest Total variable cost (1,375) = Total fixed cost (2,625)
Variable cost pr (0.625) x Room nights forecast (4200) = Total variable cost (2,625)
Total variable cost (2,625) + Total fixed cost (2,625) = Total semi-variable cost (5,250)

In conclusion, cost behaviour enables them to control the organisation’s cost and make effective decisions. It must be considered in the break-even analysis in order to set prices correctly and ensure profitability. It benefits budgeting and forecastost-classification/)ing as they are more accurate if reflecting cost behaviour patterns.

We can write a custom essay on

Managing fixed and variable costs in a business Es ...
According to Your Specific Requirements.

Order an essay

You May Also Find These Documents Helpful

Not All Men Are Sly Foxes

In Armin A. Brott's Essay "Not All Men Are Sly Foxes," he asserts that men are not presented as good fathers. To back this up, he tells us that several books, including children's books, show it to us clearly. However, he fails to persuade us because of his use of hasty generalizations, oversimplifications, and unfair use of information. In fact, in other books men are presented as good fathers providing stability and discipline within the home. Brott begins by acknowledging while men and women are not yet equal in childcare, children's books aren't helping. Fathers are still being portrayed with the same negative stereotypical lines, such as harsh, cold, and neglectful. The mothers, on the other hand, are primarily the warm, gentle, loving, caregivers and nurturers to their children. For examples he uses, Mother Goose and the Sly Fox and the Little Gorilla, which shows only the mother hugging the...

Lean Six Sigma Implementation Industry

Abstract—The Process Capability Analysis is to determine how well a process meets the specification limits. In manufacturing company it is essential to investigate whether the production process is in control and to state that the process is capable or not. In this study Process capability is performed in Strainer component manufacturing in Pump Industry to check whether the process is capable are not. It is observed that some parts are out of tolerance limit and production was instable. Index Terms— Lean Six Sigma, Process Capability, Process Control, Strainer INTRODUCTION Six- Sigma allows only 3.4 defects per million. Six-Sigma is a management philosophy to eliminate mistakes, rework and waste. It is a problem solving method to increase customer satisfaction and profit and reduce cost. Six Sigma is a financial improvement strategy for an organization. It is a quality improving process by reducing the defects, minimize the variation and improve capability in the...

Analysis and Value Chain Analysis

The report provides knowledge about strategic management of Disney. In addition to this, the report provides knowledge towards industry with the help of porter five force analysis.The internal business atmosphere is analyzed based on VRIO frame work.And the external business of the company analyzed by the PESTEL framework. Disney is everywhere these days, but almost hundred years ago it all started with one idea, cartoons. The Disney company have five major divisions which are Media Networks, Parks and Resorts, The Walt Disney Studio, Disney Consumer Products and Disney Interactive.Strategy is defined as the plan of action for a long term goal. Disney aim is to gain global dominance in producing and providing entertainment and information by making the advantage of wide variety of brands to be unique in our products and services (Walt Disney, 2017). The mission statement represents that they have a clear goal to achieve best entertainment in the Future. The main strategy of Disney is to develop the best and...

Popular Essays

logo

Emma Taylor

online

Hi there!
Would you like to get such a paper?
How about getting a customized one?