Also, various methods of controlling costs such as standard costing system and flexible budgets have close relation with the variable costing system, in turn making it easy to use those methods. 3. Companies using variable costing system are able to prepare income statement in contribution margin format that provides necessary information for cost volume profit (CVP) analysis. On the flip side, this data cannot be directly obtained from a traditional income statement prepared under absorption costing
Fixed costs do not fluctuate in reference with the quantity of production. They are called fixed costs since they are fixed regardless of the quantity of manufacture. The costs of facility payment are cover under the fixed cost. Every month is the same regardless of how many cars General Motors produced during that period of time. Elements that can influence variable cost are; supply and demand, task difficulty, location and effectiveness.
The CVP way to deal with examination is useful, yet it is constrained in the measure of data it can give in a multi-item operation. A great part of the investigation that is finished by business directors who utilize this approach is done in view of a solitary item. Cost-volume-benefit investigation is significant in showing the impact on an association that adjustments in volume (specifically), expenses and offering costs, have on benefit. Be that as it may, its utilization is constrained on the grounds that it depends on the accompanying suppositions: either a solitary item is being sold or, if there are various items, these are sold in a steady blend. We have considered this above and seen that if the consistent blend supposition changes, so does the earn back the original investment point.
It provides useful information to the management for pricing the product of the enterprise, as the variable cost per unit is constant from period to period within a short span of time, the decision on pricing the product can be easily be taken by the management. (Bhattacharyya, 2011) It helps the management in the process of the cost control by concentrating on Variable Cost alone, as Fixed Costs are non-controllable in such a short span of time. It provides many useful methods to the management for decision making like BE Analysis, Profit-Volume Ratio, and Variable Cost Ratio and so on. It ensures a greater control over the cost through Standards Costing and Budgeting Control. Use of Marginal Methods is very simple as it is very easy to understand and very simple to operate.
Cost Analysis This is the methodology of checking the status of the undertaking to redesign the task plan and overseeing changes to the expense standard. It includes taking the expense standard and execution information about what has really been carried out to focus the work fulfilled against the sum used. Checking the use of trusts without respect to the estimation of work being fulfilled for such uses has little esteem to the undertaking other than to permit the task group to stay inside the approved subsidizing. The way to powerful cost control is the administration of the sanction cost execution standard and the progressions to that gauge. For those undertakings that are supported at different stages amid the project, financing prerequisites
Cost Behavior: The understanding of cost behavior is fundamental to management accounting. The traditional idea of cost behavior is that costs can be treated as fixed or variable based on their relationship to volume or a related cost driver. In cost accounting literature, cost behavior can be classified into two, namely fixed costs and variable costs. Fixed costs are defined as the cost which does not entirely change when business activity increased or decreased, while the variable cost is the cost which the total proportionally increases towards the increase in activities and proportionally decreases towards the decrease in activities (Carter, 2009). Variable costs proportionally change by changing in driving activities; the magnitude of
Question 1 Criticisms of cost benefits analysis Accuracy This concept relies heavily on the accuracy of costs and benefits estimates. The estimates are arrived at after inferring from past projects data which are more often different in size and duration. The analysis is also subject to confirmation bias and subjective impressions in a bid to influence the supporters of certain projects. The process of cost-benefit analysis have loopholes that allow for people to either exclude or include fundamental costs that may influence the overall decision on the projects. Time The cost-benefit analysis process is lengthy and may result in significant delays in making important decisions.
The startup costs will vary from the variable cost. The Fixed cost and variable cost will be mentioned in the cash flow. “Elegant Bridal Shop”s fixed cost will not change but every month or year the quantity of the product will be increased. During three years or five years period the income will fulfill the expenses. Fixed costs do not change when the quantity of output changes.
Teck Guan Perdana Berhad need to increase the volume of the sales of their company without the reducing the selling price or the growing of the cost of goods sold per unit so that they have a qualified profit or they can buy their needed goods in the future. Since the fixed manufacturing cost per unit becomes lesser as production volume becomes larger, Teck Guan Perdana Berhad’s growing sales volume can reduce the cost of goods sold. A reduction in cost of goods sold per unit which can increase the gross profit margin also be called as increasing in the volume of sales. Net Profit Margin