MANAGERIAL ACCOUNTING: Explanation of Fixed Costs
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Write a 2 paragraph memo to your manager to explain various cost estimation techniques that can help determine the fixed and variable portion of each mixed cost (such as utility costs, maintenance costs) and why it is relevant to more accurately understand the types of costs.
Explain how to arrive at the appropriate derivation of a cost.
Use effective communication techniques
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Solution Summary
The solution provides a memo that explains the estimation techniques involved with fixed and/or mixed costs.
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Variable costs," which increase directly in proportion to the level of sales in dollars or units sold. Depending on your type of business, some examples would be cost of goods sold, sales commissions, shipping charges, delivery charges, costs of direct materials or supplies, wages of part-time or temporary employees, and sales or production bonuses.
"Fixed costs," which remain the same regardless of your level of sales. Depending on your type of business, some typical examples would be rent, interest on debt, insurance, plant and equipment expenses, business licenses, and salary of permanent full-time workers. HIGH-LOW METHOD:
This is a method for separating costs into fixed and variable components, based upon the difference between costs at the highest and lowest observed levels of activity
With the high-low technique, the highest and lowest levels of activity are identified for a period of time. Say the highest repair paid is ...
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