Question

Differentiate between a variable cost and a fixed cost. Explain why the distinction between variable and fixed costs is important in cost accounting

Answer 1

Fixed Cost

Fixed Cost is the cost which does not vary with the change in the volume of Activity. Fixed costs remain same regardless of whether goods or service are produced or not.Company cannot avoid Fixed Cost. Example:Rent,Depreciation etc..

Variable Cost

Variable cost is the cost of elements which tends to directly vary with the volume of activity.A Company's variable costs increase and decrease with its production volume.when producton volume increase,the variable cost will increase.If production volume decrease,also variable cost will be decrease

Importance of Classification of cost as fixed and variable

1) Profit planning

2) Effective cost control

3) Fixation of selling price

4) Marginal costing and Break even analysis

5) Budgetory controls

6) Proper absorption of overhead

7) Helpful to Decision making