Question

Define fixed and variable costs. Give examples of each. Can a company budget for variable costs? Explain

Answer 1

Fixed cost:

Fixed cost means, a cost that doesn't change irrespective of units produced.

Fixed cost remains constant irrespective of units produced, fixed cost in total constant, but per unit it will changes

Examples : factory rent , salary of supervisor

Variable cost:

Variable cost is cost that changes with respect to units produced. Variable cost in total changes but per unit it will remains constant.

Examples: direct materials, direct labour

A Company can budget for variable cost based on the past experience and prevailing market price even through there is little variation in variable cost rates for example, increase in materials prices.

Example: Based on estimated overhead and estimated hours, variable cost per hour is estimated and applied on units, if there an excess or lower amount is reported then it will be adjusted by over or under absorption overhead.