The difference between fixed and variable costs Essay

Difference between Fixed and Variable Costss

Fixed costs which are sometimes named as sunk costs are costs that do non change in proportion to degree of activity between payment intervals. It is impractical and besides due to contractual understandings that these costs can non be adjusted on a short term period. These costs remained the same regardless on how much merchandise are produced with the capacity scope.

Variable costs, as the name implies, is in contrast to fixed cost. The costs incurred alterations with payment intervals. The costs alterations in entire as the figure or sum of production alterations per unit.

Examples of Fixed Costss

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UrPrint Factory lease

Factory lease are fixed cost as it is normally based on contractual understanding yearly or bi-annually depending on the rental. So the rental cost will non alter on monthly footing and the cost of rental would be the same regardless on how much T shirts were printed daily, hebdomadal or monthly. The rental cost will merely alter unless there is an enlargement of concern where the current rental infinite is deficient to back up the production and necessitate larger rental infinite.

UrPrint Operation Manager wages

Managerial wages are considered fixed costs as their wage are based on contractual understanding. Their wage will non alter every month. And there are no “ over clip wage ” required for managerial place. Hence their wage will non alter over short term footing irrespective of sum of production or work. Their wage will non be adjusted likely on per annum footing when there is a wage increase.

Factory Insurance

Insurance for mill would non alter over dark ; it is normally based on reclamation contract on a annual footing. Hence it is considered as fixed costs to the mill. The cost of insurance will non alter with increased or reduced printing of Tshirts.

Examples of Variable Costss

Material costs

Material costs such as jersey, silk screens and pigment required by UrPrint are considered variable costs. The cost of stuff will alter with more/less units required. Example when there are more printing required, the mill would necessitate to buy more jersey and the purchase cost of 100 jersey is cheaper than cost of 50 t-shirt hence it will convey down the cost of stuff and it will alter the cost with different sum of jersey purchased.

Labor costs

Labor costs which are the manpower cost are variable cost. It will alter with the degree of activity of the production. Example when there was an increased in demand for printing of jersey and in order to run into the timeline given by clients, the mill may necessitate to run over clip which will justify the demand to pay the production staff over clip wage which would ensue in alterations in the labor costs.

Utility costs

Utility costs which include electricity and H2O are variable costs to the mill. The sum required depends on the size and sum of production.

Example when the mill has to run over clip to run into the demand of clients, the sum of electricity used to back up the map of the production will be increased.

Question 3b )

“ All Variable costs are governable while all fixed costs are unmanageable ” .

I would partly hold with the above statement.

And agreed that “ most ” variable costs are governable but “ non ” all fixed costs are unmanageable.

Variable costs are governable but non for all. And though many fixed costs are unmanageable, there are some that are within control by the direction. Variable costs are largely governable. Variable costs include material, labour and overhead costs that change over degree of production and activity. Example stuff costs are governable when the mill can beginning the natural stuff and choose the best citation from different sellers or providers to do certain the company wage reasonably for the stuff costs. The mill can dicker for less material cost with bigger measure purchased. Labor cost can besides be governable as the operation director can schedule the production clip decently and expeditiously to guarantee that the production clip is optimized and no over run production is required and will non ensue in increased labour cost.

However there are besides instances when variable costs are non governable. Take stuff costs as illustration, the cost of natural stuffs can be extremely dependent on the handiness of the natural stuffs. Such as when there is a drouth in Thailand where many harvests were destroyed, the costs of wheat go up and are non within control. Similar to variable cost, some fixed costs are governable as good.

Fixed cost though they do non alter every bit frequently as variable cost, it may be governable. Fixed costs are largely compulsory cost such as rental cost. A company would decidedly necessitate an office or production infinite nevertheless the cost is governable. The direction can command fixed cost such as rental cost by taking a rental infinite that is less dearly-won. Example, the rental infinite for UrPrint for current location and infinite is $ 50K per month ; the direction can cut cost by leasing a infinite that is cheaper and compromise on the location of the infinite.

In this scenario, the direction of UrPrint has the purpose to purchase a new and bigger mill as portion of their future enlargement programs alternatively of rental. That would impact the fixed cost of the company.

And besides the selling ( fixed ) cost incurred by the selling executive to prosecute an advertisement bureau can be controlled every bit good. The executive can negociate for better advertisement contracts by sourcing from different bureaus. Hence when there is a pick or option, it is frequently governable.

In drumhead, many of the variable costs are governable while some of the fixed costs are governable as good.

Question 3 degree Celsius )

Difference between Direct and Indirect Costss

Direct costs include activities or services that benefit and impact the undertaking specifically. While indirect costs include activities or services that benefit and impact more than one undertaking.

For direct costs, the activities and services are likely and easy traced to the undertaking and the costs are charged to the undertaking severally. Example, in a fabrication works, the natural stuff costs and direct labour costs needed to bring forth the goods are direct costs.

For indirect costs, the activities and services are less likely and less easy traced to the undertaking. It is non easy identified to profit a particular undertaking. Example, it is instead hard to account for the activities of the manager in a company on how it benefits the operations of the company.

Indirect costs do non alter significantly within certain production volume hence are frequently considered to be fixed cost whereas direct costs normally change within certain production and are frequently considered as variable costs.

However I merely agree on the statement that “ all variable costs are direct costs while all fixed costs are indirect costs ” to a certain extent.

In this scenario, the cost of bring forthing a silk screen mold is considered direct cost nevertheless it is non variable cost as the cost is non dependent on the sum of jersey being printed.

Take for case ; the cost of silk screen mold is fixed at $ 2000 regardless of whether 600 or 1000 jerseies are printed. Hence the silk screen mold is direct cost to the production with fixed cost that is non dependent on production volume. Hence non all direct cost is variable cost which was proven in this case. But by and large most variable costs are direct costs and most fixed costs are indirect costs. Example, when there is an mistake committed when doing the silk screen which resulted in 40 jersey printed with the incorrect logo, this incident is considered direct cost to the production.

And the accident includes covering the error on the 40 jerseies with white pigment which incurred variable cost of $ 20 white pigment and extra labor cost of $ 60 with usual overhead application. The cost incurred is dependent on the sum of error or figure of jersey with error so it is variable cost.

Another incident in this scenario resulted in direct costs with variable costs when the arms of 20 other jerseies are burned and extra variable cost of $ 1 per jersey is incurred to cover up the burnt and resell to their employees. It is a direct cost to the company and the cost of repairing and reselling of the burned jersey alterations, it is variable cost.

Hence by and large most variable costs are direct costs but non for all cases which were explained earlier in the instance for the direct cost of silk screen which is considered as fixed cost.

Question 4

Lian Beng Group Ltd is an puting retention company, it provides technology and leasing of building machinery, constructing building, civil technology and building support services. The group besides manufactures and sells ready-mixed concrete. The company besides involves in energy related industry, belongings development and building workers preparation.

The board of managers consists of president, two independent managers and two executive managers.

Chairman and Managing Director of the group is responsible for the direction concern development and group ‘s overall strategic way.

Independent Director who does non keep any portions in the company or any of its subordinates. He serves as Chairman of the Remuneration Committee and is besides a member of the Nominating and Audit Committees.

Another Independent Director who does non keep any portions in the company or any of its subordinates. He serves as Chairman of the Nominating and Audit Committees and is a member of the Board ‘s Remuneration Committee.

The Executive Director of the group is the caput of the Group ‘s contracts section ; supervising several cardinal facets of the Group ‘s building operations, which consist all stamp entries, the direction and reappraisal of undertaking costs and budget, cardinal stuffs procurance, and the award of contracts to sub-contractors. She besides assists in advancement reappraisals and execution of workflow enterprises that seek to better and polish the Group ‘s work processes in conformity to new market tendencies and alterations.

Another executive manager of the group, she is in charge of the Group ‘s finance and human resource maps. In her present capacity, she is responsible for the organisation and direction of the Group ‘s accounting, finance and corporate actions, every bit good as for all affairs associating to human resource direction within the Group. Together with her fellow executive managers and cardinal executives, she is besides involved in advancement reappraisals and execution of workflow enterprises for the intent of bettering and fine-tuning the Group ‘s work processes in conformity to new market tendencies and alterations.

There are another eight key executive officers who have of import functions and duty in the group.

The Plant and Machinery manager is responsible for supervising the group ‘s technology division ; he has to supervise the advancement of stuffs use by the group ‘s building division. In add-on, he is besides responsible for supervising the operations and direction of the group ‘s ready-mix concrete concern.

The 2nd executive, Project manager is responsible for the group ‘s foreign labor planning and deployment maps, he besides has to pull off the group ‘s foreign workers developing division. In add-on, he is portion of a direction squad that manages the building division ‘s edifice undertakings.

Third executive, Purchasing Director of the group manages the group ‘s buying division and oversees the group ‘s inter-companies stuff and machinery logistics deployment. She besides administers the Group ‘s foreign workers ‘ paysheet map. Since fall ining the Group in 1988, she has gained huge experience in procurance activities in the building

industry in her place as Purchasing Director. Her well-honed accomplishments and extended cognition has enabled her to dispatch her duties expeditiously and efficaciously.

Fourth executive, Financial Controller of the group is responsible for the fiscal accounting, fiscal direction and internal control maps of the group. Before he joins the group, he had over 16 old ages experience in fiscal and direction accounting, costs and budgetary control and fiscal direction in the trading, building and fabrication concern.

Fifth executive, Director of Deenn Engineering Pte Ltd ( “ Deenn ” ) , he forms portion of the direction squad that manages the Group ‘s building division ‘s edifice undertakings, with particular focal point on its design-and-build maps.

Sixth executive, Construction Director of the Group, he forms portion of the direction squad that manages the Group ‘s building division ‘s edifice undertakings, with particular focal point on its quality direction and productiveness sweetening. He has more than 20 old ages of undertaking direction experience in the building industry and has been the cardinal driver in quality and sustainable green enterprises for all the private condominium undertakings undertaken by the company. His huge experience and strong accent on presenting quality merchandises have enabled him to teach the puting up of the building division ‘s Quality Assurance & A ; Quality Control ( QA/QC ) commission. He besides takes charge of the division ‘s ISO integrated direction system and its green enterprises.

Seventh executive, Senior Construction Manager Construction division in the group, he forms portion of the direction squad that manages the building division ‘s edifice undertakings. He besides oversees the division ‘s workplace safety and wellness portfolio. With more than 20 old ages of building and undertaking direction experience, he is actively involved in the direction of assorted constructing contracts undertaken by the group. He besides has been tasked to pull off the Group ‘s building undertakings and its safety and wellness maps.

Last executive, Director of Sinmix Pte Ltd ( Sinmix ) , he is in charge of the day-to-day direction of Sinmix ‘s concern operations. His 25 old ages of experience in the ready-mix industry has enabled him to take the division expeditiously in pull offing its assets allotment and cost control measures, every bit good as guarantee a smooth supply concatenation within the division ‘s web of clients and providers.

To effectual corporate administration, three commissions are formed, viz. Nominating Committee ( NC ) , Remuneration Committee ( RC ) and Audit Committee ( AC ) . They besides appoint an external audit company which determines the company ‘s declared concern activity is the same with the consequences reported in the fiscal statement. The audit company besides checks on the company ‘s clerking methods to find they are in conformity with by and large accepted accounting patterns.

The Audit Committee consists of 1 non-executive manager and 2 of the independent managers. The commission has authorization to look into all affairs within its footings of mention, full entree and cooperation by direction.

agencies there should be different ppl making different range. as in the buyer should non be the 1 who do the accounting aso. one think talk notes have one… u look into it out.


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