Question

Discuss the differences between variable costs and fixed costs. Why is it desirable to allocate variable costs and fixed costs separately? Give an example of each type.

Answer 1

Variable costs	fixed costs
These cost vary with output	these costs doesn't vary with output
These cost are there for short and long period	these costs are only there for short period. In long run all costs are variable
These cost are not there if there is zero level of output	these cost are there even at zero level of output
Direct material, direct labour	factory rent, depreciation etc

It is desirable to allocate differently to determine the closing value of inventory and helps to know the contribution so the business can put targets.