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Memo: Discussing Fixed, Variable and Mixed Costs

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Details: You have been studying 'fixed' costs. You learned that a number of 'fixed' costs are actually mixed costs (variable and fixed). Write a two paragraph memo to your manager explaining some of the cost estimation techniques that can help determine the fixed and variable portion of each mixed cost (such as utility costs and maintenance costs). Your response should not be limited to just the definitions of fixed, variable, and mixed costs.

Objective: Explain how to arrive at the appropriate derivation of a cost.

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Solution Summary

In a 367 word response, the solution provides a memo which explains the concepts of fixed, variable and mixed costs with examples. The memo further discusses how to discover mixed costs and how to implement a system to properly code those costs for the income statement.

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Memo to Manager
Date xx-xx-20xx
Cost Estimation Techniques

The nature of a cost that is fixed or variable is easily accounted for, but the mixed cost can be more difficult to define. A mixed cost is one which has a fixed component as well as a variable component. For example, the electric billing for a factory will vary with the amount of production whereas there is a basic amount which will be used regardless of production (security lighting, heating, etc).

An algebraic definition of a mixed cost "is y = a + bx, where y is the total cost, a is the fixed ...

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