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Varying and Fixed Costs

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1. What issues will create variances within a company?

2. What other information can we derive from our variance analysis?

3. What expenses would you imagine to be fixed in nature?

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Solution Summary

This solution discusses which issues create variances within a company and other information that management can derive from a comprehensive variance analysis. This solution also discusses fixed expenses and includes several examples of fixed expenses.

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1. What issues will create variances within a company?

There are many reasons why variances exist. One of the main reasons is because, due to unforeseen factors, the company went outside of their relevant range in production. Costs are only relevant within the relevant range of production (let's say, between 15-20,000 units). If the company produces 22,000 units, the costs are no longer relevant and variances are created because expenses climb higher or lower, based on the relevant range and actual number of units produced that were not within the relevant range. In addition, suppliers often change prices and the company experiences unexpected price ...

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