Question

Explain the difference between fixed and variable costs and give two examples of each. Can a company budget for variable costs? Explain

Answer 1

Answer:

Fixed cost in an organization does not change and is fixed while the variable cost keep changing if the production is increased.

Explanation:

Fixed cost are said to be that cost which does not change with production level for a certain limit. Let us suppose there is no change in the rent amount if we have only factory for the production of goods.

But the variable cost are those cost which increases as production increases. More will be the variable cost when the production will be more. Also for per unit basis, the variable cost remains the same.

Fixed cost are not important in decision making if there is an excess of capacity available.

For example,

Direct labor, direct material -- variable cost

Salary of supervisor, rent of factory -- fixed cost

Even though there is not much change in the variable cost, like for suppose material price increases, a company can still make a budget that is based on the past experience and predicting the market prices. Similarly, if there is a machine that uses three units of direct material for a piece if finished product, which is not going to change in the future. Thus the company can make a budget.