As SAC's corporate business financial analyst, you will need to have a clear understanding of the different types of costs (variable, fixed, and mixed) that the company carries. Review SAC's journal activity. Identify and define the variable, fixed, and mixed costs. Next, determine what affect a sales volume increase or decrease will have on unit fixed cost, unit variable cost, total fixed cost, and total variable cost.
Before moving towards the next part of the instructions, initially, we have to interpret about the precise meaning of 'Cost' because it is extremely broad and a general concept. In this part, we will also talk about the different types of costs. So, firstly, we will discuss about the cost under the heading of Introduction, for example:
The concept of 'cost' in accounting is extremely wide and universal. The different fascinated users like cost accountants, economists formulate the concept of cost, as per their necessities because cost is crucial pre-requisite of decision making, as well as, for assuring costs (Oliver, 1999). It is determined as the sum of spending obtained on or credited to given items i.e. supplies, services, labor, products, equipment, etc. for use, by the organizations and other accounting bodies.
The purpose of different types of costs is exclusively different from one another. Hence, cost is realized in its relationship to the functions that it is to assist (Oliver, 1999). The report pertains to the costs, providing the information about the expenses consumed in the manufacturing of a product or furnishing service. In the business, costs are mainly assorted or assembled according to their common characteristics, so that it will be easy for the owner to identify the costs with units of products & services.
Likewise, cost may be variable, fixed, mixed, semi-variable, labor cost, selling & distribution cost, development cost, controllable cost, uncontrollable cost, etc. This accounting information linked to the analysis of cost, not only assists the management team in arriving at fair decisions; but also to flourish vital information related to costs, in order to effectively evaluate performance and also the cost control (Oliver, 1999).
Above, we talked about the concept of costs. As per instructions, now we will discuss about the different types of costs i.e. variable, fixed and mixed to key out difference between them. I am just rendering you a brief overview to arouse your learning skills.
According to nature or behavior, costs are chiefly sorted out into three costs i.e. variable, fixed and mixed cost. All the different types of costs assist in decision making because by identifying or interpreting the various costs, one can easily assess variations in the cost, as result of changes in amount of sales. The brief description of the different types of costs is given below in order to perceive the precise meaning.
- Variable Cost: The Variable Cost is defined as the cost that is increased or decreased precisely in the same fraction, as per the variation in the level of sales (Fixed and Variable Costs). A proper interpreting of variable costs can help out with the critical selections, which is mainly required to earn the maximum amount of profit.
- Fixed Cost: Fixed Cost is characterized as the cost, which does not show any variation due to changes in the sales and production levels like rent, interest expense, property tax, insurance, etc. (Hutchinson, 2007). Within the certain range, this type of cost tends to stay constant for all the levels of sales volume or business activity.
- Mixed Cost: Mixed Cost is defined as the cost that includes the components of both costs i.e. fixed & variable costs (Mixed costs, 2009). It is also called by the other name i.e. semi-variable cost or step cost, which generally ...
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