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Variable & Fixed Costs, Contribution Margin, and Full Costing

1) Define variable and fixed costs. Comment on how these costs are used to estimate future requirements.

2) Discuss how contribution margin is used by managers for decision making.

3) Define full costing and give an example how full costing is applied and used by managers to make good business decisions.

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Dear Student,

Define variable and fixed costs. Comment on how these costs are used to estimate future requirements.

Variable costs:
Variable costs are the cost of material, labor or overhead that changes exactly with the volume of production. Therefore, total amount of variable costs will be different for each level of production and the variable costs per unit remains constant.

Fixed costs:
Fixed costs is the cost which do not vary with the level of production and therefore, fixed costs per unit will be more with less volume of production and the fixed costs per unit will be less with more volume of production. Fixed costs will be incurred by the company irrespective of whether there is any production or not.

Fixed costs and variable costs are useful for estimating the future requirements of costs. For example, if the company is planning to manufacture ...

Solution Summary

This solution defines variable and fixed costs, discusses how contribution margin is used by managers for decision making, and defines full costing, providing an example how full costing is applied and used by managers to make good business decisions.

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