But how do you measure the investment? Measuring Costs Costs are the easiest thing to measure, but they can be difficult to measure. Total cost is the sum of fixed cost and variable cost.
In this sense, the cost "varies" as production varies. Example 2[ edit ] For example, a firm pays for raw materials. When activity is decreased, less raw material is used, and so the spending for raw materials falls.
When activity is increased, more raw material is used, and spending therefore rises. Note that the changes in expenses happen with little or no need for managerial intervention. These costs are variable costs.
A company will pay for line rental and maintenance fees each period regardless of how much power gets used. And some electrical equipment air conditioning or lighting may be kept running even in periods of low activity.
These expenses can be regarded as fixed. But beyond this, the company will use electricity to run plant and machinery as required.
The busier the company, the more the plant will be run, and so the more electricity gets used. This extra spending can therefore be regarded as variable.
In retail the cost of goods is almost entirely a variable cost; this is not true of manufacturing where many fixed costs, such as depreciation, are included in the cost of goods.
Although taxation usually varies with profit, which in turn varies with sales volume, it is not normally considered a variable cost. For some employees, salary is paid on monthly rates, independent of how many hours the employees work.
This is a fixed cost. On the other hand, the hours of hourly employees can often be varied, so this type of labour cost is a variable cost. The cost of material is a variable cost.The first thing you need to do is to work out your overall ‘Fixed Costs’ and then your ‘Fixed Cost Per Unit’.
It’s really important that you don’t forget to include ALL costs involved with making your product. Because average variable cost is total variable cost per unit of output, it can be found by dividing total variable cost by the quantity of output. Alternatively, because total variable cost is the difference between of total cost and total fixed cost, average variable cost can be derived by subtracting average fixed cost from average total cost.
Practice Questions and Answers from Lesson III Inputs and Costs The following questions practice these skills: Identify total cost, variable cost, fixed cost, marginal cost, and average total cost. Fixed costs, as opposed to variable costs, are defined as costs that remain the same over a period of time.
Conversely, variable costs are subject to change . Feb 09, · Fixed and Variable Costs You'll remember from the previous post that there's more than one way to define cost. The methods were: Differential future cash flows (DFC) Cost behaviour in relation to output Assignment to cost object Financial statement perspective Business function The previous post focused on DFC, and this post is about cost.
Fixed and variable costs are a crucial part of a financial analysis Determine fixed and variable costs to better understand your cost structure. You should be aware by now of the profitability framework in which we calculate profits by subtracting costs from the revenues of the business.