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# How do variable costs and fixed costs differ (with examples)?

a. Chapter 15: Discussion Questions 9-11, 17, and 19.
b. Chapter 15: Practice Exercise 15-8 Fixed Costs and Variable Costs
c. Chapter 15: Practice Exercise 15-13 Direct and Indirect Costs
d. Chapter 15: Practice Exercise 15-15 Out-of-Pocket Costs and Opportunity Costs
e. Chapter 15: Exercise 15-8 Cost Classifications

9. How do variable costs and fixed costs differ? Give an example of each.
10. Analyze your personal expenses on a variable and fixed basis. What are some of your personal fixed costs and variable costs? What would cause them to change?
11. What is C-V-P analysis used for? In the process of using C-V-P analysis, what does it mean to "break even"?
17. What is the difference between a direct cost and an indirect cost? Give an example of each in the context of teaching an accounting class at your school.
19. How can out-of-pocket costs and opportunity costs be applied to your personal financial decisions?

15-8 Fixed Costs and Variable Costs
Which of the following is an example of a variable cost?
1. Insurance premium for fire insurance on the factory building
2. The salary of the company president
3. Wood used to make custom tables
4. Rent for use of a storage warehouse
5. Depreciation on the factory building
15-13 Direct and Indirect Costs
Which one of the following statements best explains why companies want to distinguish between direct and indirect costs?
a. To evaluate business segments on the basis of only those costs directly traceable to each segment
b. To better determine whether a company is a large organization or a small organization
c. To determine the sales prices necessary to break even
d. To better distinguish between variable and fixed costs for each product
e. To better distinguish between materials costs and labor costs

15-15 Out-of-Pocket Costs and Opportunity Costs
Which one of the following is an example of an opportunity cost?
a. Revenue lost from sale of cakes by deciding to sell only cookies
b. Wages paid to construction workers
c. Materials used to assemble computers
d. Ordering costs related to a customer's special order of guitar strings
e. Rent paid for the use of a factory building

15-8 Cost Classifications
The following are costs associated with manufacturing firms, merchandising firms, or service firms:

a. Miscellaneous materials used in production
b. Salesperson's commission in a real estate firm
c. Administrators' salaries for a furniture wholesaler
d. Administrators' salaries for a furniture manufacturer
e. Freight costs associated with acquiring inventories for a grocery store
f. Office manager's salary in a doctor's office
g. Utilities for the corporate offices of a toy manufacturer
h. Line supervisor's salary for a clothing manufacturing firm
i. Training seminar for sales staff of a service firm
j. Fuel used in a trucking firm
k. Paper used at a printing business
l. Oil for machinery at a plastics manufacturing firm
m. Food used at a restaurant
n. Windshields used for a car manufacturer

Classify the costs as (1) product or period; (2) variable or fixed; and (3) for those that are product costs, as direct materials, direct labor, or manufacturing overhead. Write "not applicable (N/A)" if a category doesn't apply.

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9. How do variable costs and fixed costs differ? Give an example of each.
Variable costs are costs which changes directly in proportion to the level of sales in dollars or units sold. For example direct material, direct labor, sales commission, bonus etc.
Fixed costs are those costs which remain the same irrespective of the production or sales level. For example rent, Depreciation.

10. Analyze your personal expenses on a variable and fixed basis. What are some of your personal fixed costs and variable costs? What would cause them to change?

Personal fixed costs are rent of the home, salary paid to home assistants. Variable costs are food, telecommunication expenses. These can change as per the change in the cost drivers. For example if I shift to a bigger house the rent will change. Similarly if more guests are there then food expense will go up.

11. What is C-V-P analysis used for? In the process of using C-V-P analysis, what does it mean to "break even"?
CVP is the study of the effects of output volume on revenue (sales), expenses (costs), and net income (net profit). Hence it is a management accounting tool that expresses relationship between sales volume, cost and profit.
Thus it seeks to provide answers to the following questions:
1. What sales volume is necessary to produce an X amount of operating profit.
2. What will be the operating profit or loss at X sales volume be.
3. What will be the effect on operating profit be if the company's fixed costs have increased or sales mix have been changed.
4. What sales volume is needed to achieve the budgeted profit or to cover the additional fixed charges from the proposed new project.

Break even analysis
Break even point is the point at which gains equal losses. Break-even analysis is a device for determining the point at which sales will just cover total costs or the break even point for a product is the point where total revenue received equals total costs (TR=TC). A ...

#### Solution Summary

This solution discusses the concepts such as variable cost, fixed costs, direct and indirect costs, and opportunity costs. This solution is approximately 1200 words.

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