Question

Wu has asked you to allocate fixed expenses. Discuss various ways you might allocate fixed expenses regardless of the availability of information. Include in your discussion avoidable vs unavoidable fixed costs.

Answer 1

Fixed expenses are not affected by any variation in the volume of activity e.g. managerial remuneration, rent that part of depreciation which is dependent purely on efflux of time. Fixed expenses remain same from one period to another period.

Ways by which fixed cost can be allocated are-

1. Number of direct labour hours

2. Total direct wages of department

3. Number of employees in departments

4. Value of assets in case of depreciation

5. Area or cubic measurement of department for rent

Avoidable fixed cost means the cost which continue to occur only when offer is to be accepted i.e. always relevant like extra supervisor salary or extra machine rent.

Unavoidable fixed cost would continue in totality irrespective of acceptance of offer hence called sunk cost like factory rent, manager salary, electricity rent etc.