There are many things to think about in accounting and running a business to make sure the financial part of it is there. If finances are not understood then it is likely the business will fail. Examining some key concepts from this week such as fixed, variable, and mixed costing, we discuss what we do and do not understand, and how it may apply to our everyday line of work or work performed in at a future point in time.
Understanding the distinction among fixed, mixed, and variable costs among the team is clear and understandable. Fixed costs are costs within an organization that remain the same no matter what changes occur in activity levels. Examples of fixed costs are rent or insurance paid. Even though the number of units produced changes the costs remain the same. If a manufacturer rents the building in which they operate, the cost per unit produced would fluctuate. For example, if the rent is $500 and 500 units produced, the cost is $1 per unit. When 5,000 units produced, cost is $0.10 per unit. Fixed costs are a little confusing because the thought of how fixed cost could fluctuate, but the cost does not fluctuate. The portion of the cost fluctuates, depending on the number of units produced. The fewer units produced a higher proportion of costs distributed to each unit, and the more units produced, a smaller proportion of the costs distributed to each unit.
Mixed costs contain both variable and fixed elements. Variable costs are costs that in total are in direct relation to the change in activity levels within an organization. The struggle with this concept a bit was with the computation of the variable cost per unit. The example in the textbook about Metro Transit was easy enough to understand. However, unless it is something used continual the calculation for variable cost per unit may not sink in. Variable costs are equally proportionate to each unit produced. 10 units at $10 = $100. 100 units at $10 =