Definition of fixed cost and variable cost

Definition of located exist and covariant constituteFixed comprise (FC) is a nest that remains unceasing, in append, regardless of commutes in the direct of application. Fixed be be not touch on by changes in activity. Consequently, as the activity level rises and falls, total rooted(p) be remain constant unless influenced by some outside force. But fixed appeal per unit decreases as the activity level rises and increases as the activity level falls. (Garrison etal., 2006, P49). Fixed be include salaries of executives, interest expense, rent, depreciation, and insurance expenses. .Variable equal (VC) is a cost that varies, in total, in direct symmetry o changes in the level activity. The activity keep be expressed in many ways, such as units adoptd, units sold, miles driven, beds occupied, lines of print, hours worked and so forth. But variable cost per unit remains constant. ((Garrison etal., 2006, P48).Direct cost, indirect cost and overhead costDirect be is a cost that short(p)en be easily and conveniently traced to the particular cost disapprove beneath consideration. The concept of direct cost extends beyond just direct materials and direct labor. (Garrison etal., 2006, P50). Example the salary of supervisory program in marketing plane section is the direct cost for marketing department. The salary is likely the equivalent all(prenominal) month not depend on the quantity of sales product.Indirect costs is a cost that female genitalianot be easily and conveniently traced to the particular cost object under consideration. (Garrison etal., 2006, P50). severally business has its proclaim method of allocating indirect costs to different products, sources of sales revenue andbusiness units.Business managers and accounts should always trammel an eye on the allocation methods procedured for indirect costs. Example Depreciation on the production gondola is in any case an indirect product cost, it stays the same each year no t depend on the volume produced on the machine.Costs can be direct and indirect depending on the cost object product, department,and others such as division, customer, or geographic market. The total amount of thecost remain the same as volume changes, it is fixed cost. It is a variable cost if the total cost change in proportion to the change in the activity or volume.Overhead costs the indirect recurring costs of running play a business that be not linked directly to the goods or service produced and sold. Overhead costs can include payments for the rent of premises, utility bills, and employees salaries.Controllable costs and unmanageable costsControllable cost atomic number 18 those costs which can be regulated or controlled by specified atom of an undertaking. close of the variable costs are controllable costs. For theoretical account, direct material, direct labor and direct expenses are controlled by the lower level of guidance.Uncontrollable cost can not be controlle d by the specified ingredient of the undertaking. Most of the fixed costs are uncontrollable cost. For character, factory rental expense, supervisors salary, depreciation.Evaluate the statementI shake trouble with the terminology-direct costs, in addition called variable costs, are the ones that are controllable. Whereas indirect costs or overheads, also called fixed costs, are uncontrollable.Based on the definitions preceding(prenominal), I strongly disagree with the statement because the delegate fabricated wrongly about the cost. There are many ways to classified cost depending on the declare oneself of management.According to association with products, costs are divided into product costs and extremity costs.According to identifiably, costs are divided into direct cost and indirect cost.According to behavior, costs are divided into fixed cost, variable cost and semi- variable cost.According to controllability, costs are divided into controllable costs and uncontrollable costs.Direct cost can be fixed cost and variable cost depending on situationsFor interpreter the salary of supervisor in patch up department is the direct cost for manufacture department. The salary is likely the same each month not depend on the quantity of product. It is a fixed cost of manufacture department. Raw material supply for manufacture department is a direct cost for department but it is a variable cost, total amount of supplies use in the department increases if the volume in the department increases.Indirect costs can be fixed costs and variable cost alsoIn opposition to direct cost, most of indirect cost is fixed cost. For example rental cost is indirect cost for part production, it is a fixed cost of manufacture department stay the same each month, its not depend on the number of product. But indirect cost can be variable cost also. The cost of electricity for administration of manufacture department is variable cost periodic depending on the number of electricity use more or less.Controllable cost and uncontrollable costMost of variable costs are controllable. To illust array low level manager in manufacture product is the direct monitoring and control of production process. They can be managing the raw material use to create product and direct labors that mean control the number of employees needed to complete product. focal point can organize the use of resources effectively in the slight term. On the other hand, many of fixed costs are uncontrollable. They are imposed in terms of management such as business can not decide the rental fees of factory, the rent for his unit negotiated by higher management, or the rates rigid by the local authority.Question 21. Participative reckoningBudget preparation is the process by which organizational goals are translated into a plan that specifies the allocated resources, the selected processes, and the desired schedule for achieving these goals. There are two main types of cyphering bottom-up bu dgeting and top- hatful budgeting. Participative budgeting is a method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by the managers supervisor, and any issues are resolved by mutual agreement.ManagerMarketingManager gross salesVice President SalesVice President FinancePresident and CEOVice President ProductionCashier masteryManager ManufacturingManager DistributionAll level of an organization should work together to create the budget. Each level in organization should contribute in the way that it outperform can in a cooperative effort to develop budget.Lower level management is responsible for setting the estimate of budget data in a participative system and submits them to the next higher level of management. Before the budget is accepted, they moldiness be reviewed and evaluated by middle management before they are transferred to the organization.Advantage of participative budgetingParticipative budgeting is relevant to all m ember of particular project, it helps to encourage all participants contribute idea to built a project effectively.Budget teaching is given clearly and fairly accurate because it use of the data available at the project management levelWorking motivation is higher when an individual directly involved in setting goals quite a than goals imposed from supra. Self-imposed budget make enduements to implement the goals.If the budget has been setting from top management, managers can state that budget is unreasonable or impractical to start, could not be performed. With participative budget, it does not happen when the managers set a budget for themselves.Disadvantage of participative budgetTime consuming and costly because too many participants involved in setting budget project.The influence of top manager is limited over the budget process. However, when the lower-level managers plan the short budgets and mid-range budgets, outlining organizational policies and goals, they can influ ence the outcome by issuing a statement.Individual tend to blow up the real resource needs because they think that all budget leave behind be cut in certain proportion by top manager and set a goal lower than true(a) for easy to achieve the goal.2. Budget segmentationa. Definition of budget variabilityTotal budget variance is simply the difference between the f tangible cost of the input and its planned cost.Total variance = expense variance + Usage varianceIn standard costing systems, the total variance is broken down into charge and usage variance.Price variance is the difference between the actual and standard unit price of an input multiplied by the number of unit used.Usage variance is the difference between the actual and standard quantity of inputs multiplied by the standard unit price of the input.Total variance = (AP x AQ) (SP x SQ)ACTUAL COST(AQ x AP)STANDARD COST(SQ x SP)STANDARD COST(SQ x SP)ACTUAL COST(AQ x AP)FAVORABLE VARIANCE(ACTUAL UNFAVORABLE VARIANCE(ACT UAL STANDARD)AQ means the actual quantity of input used to produce the outputAP means the actual price of the input used to produce the outputSQ means the standard quantitySP means the standard priceFavorable variance and bad variance are not equivalent to good and bad variance. The terms indicate the relationship of the actual price or quantities to the standards prices and quantities.b. Budget variance investigationManagers responsibility is carefully calculated the variance because that is a part of effective control of organization. In general, it is difficult to manage external sources of budget variance (government policy, plow market, fluctuation of exchange rate) rather than internal sources (raw material, cost per hour on direct labor). Management should know about the acceptable range of performance.If the budget has a favorable balance that means it has brought the addition to the society. Conducting an investigation to find out the reason why the variance of budget was favorable and it could be made more than in the future.If the variance is small, it should not be too worried. In fact, a little variance between actual budget and the projected figures is always happens. With the truly small difference, the manager can ignore them, no need to adopt strong action because it does not bring terrible consequences for the business. So, with little difference, the best way to solve is simply putting it into stride.If the budget has unfavorable variance, head of department need to conduct an investigation to find out the main causes by external influence or internal influence. For example the increase of raw material usage per unit more than allowed standard because it was poor condition of machine or poor manufacturing. Find the cause and how to fix the problem it is a good measure to counteract a similar situation may occur in the future. After having adverse variance the budget needs to rewrite or the budget needs to verify by internal audit.Que stion 3Explain the term used in the statement1. commit fixed costsCommitted fixed costs relate to the investment in facilities, equipment, and basic organizational structure. The two characteristics of attached fixed costs are that they are long term in natural, and they cannot be significantly reduced event for short periods of epoch without seriously impairing the profitably or long- run goals of the organization. Even if operations are interrupted or cut back, the move fixed cost will still continue largely unchanged (Garrison etal., 2006, P190). For example Vietnam airlines has total 80 aircraft, the company essential pay money for depreciation, maintenance and insurance expense. The expense is not depend on the number of propagation the plane fly or the number of passenger in plane. It is a committed fixed cost.Decisions to acquire major equipment or to take on other committed fixed costs involve a long planning horizon. Management should make such commitments totally aft er carefully analysis of the available alternatives. Once a decision is made to acquire committed resources, the company may be locked in to the decision for many years to come (Garrison etal., 2006, P191). For example the total committed fixed cost of renting the building for the hotel is real high and the company must commit to pay for it at least 5 years in Vietnam.Uneven revenue flowsIt is showed that the difference of ingest (low or high) for product or service in different periods. At times the company is very busy and at others it suffers from very slack periods. The hospitality industry is often divided into two trenchant periods high season and low season. The period time between two seasons can move and change each year. In high season, the hotel does not have enough room for customer and the room rate is very high that bring large of profit for the hotel. In contrast, in low season the hotel must reduce the price and apply promotion to attract tourist. It is a common situation of hotel and resort.The implication of the above situation for the companyMany of our cost are committed fixed cost. Our revenue flows occur very unevenly. To be profitable we have to take a flexible approach to pricingThe company in hospitality industry has large proportion of fixed cost for the initial investment so the analyze even point is also very high. Company will operate with high level of energy before earning a profit. But when passed break even point the profit will increase rapidly.Committed fixed cost has a little effect to the level of costs in the short term. tax is the money the company receives for selling their product or service. It is calculated by taking the selling price and multiplying it by the number of units sold. Profit is the amount of money left over after costs have been covered. It is calculated by total revenue minus total costs. Therefore, profits will not be improved by a greater emphasis on cost management of costs. The company will g et profit if the revenue is maintained consistently above break even level. Due to the temperament of leisure industry, the product is not in storage so the focus on revenue during the period low level of demand is the necessary task of this company.By adopting a flexible approach the company is adapting the price of the product or service to suit the situation of the company and the amount of money customers are willing to pay. But the given price must be greater than variable cost and above break event point. This pricing strategy is designed to attract as much business as possible when the company has spare capacity. The price will be increased for busy periods when the company can expect to operate near to full capacity.For example In Vietnam, Da Nang has a long graceful coastline. Seaside hotels have a high level of demand in the summer (from May to August), this time mainly to serve domestic tourist. The room rates are usually higher two times as much as normal. The hotels h ave maximum revenue in this period. In the low season from October to February next year, the hotel has launched promotions to attract tourist such as discount 30% room rate at Furama Resort or stay 2 night get 1 night free at Golden Sand Resort. In this case, at times of low volume an inflexible, cost orientated approach to pricing.