Fixed And Variable Cost

Introduction

There are two different categories for cost; they are either classified as fixed costs or variable costs. These costs also behave differently based on the level of sales volumes. I am running a restaurant and have identified certain costs along with the number of annual units sold of 1,000. I also wondered if I was to increase the sales volume to 6,000 units and then to 8,000 units the following year would it change the annual cost and unit cost for each?

One cost is raw materials with a total annual cost of $650 and the other cost is building rent with a total annual cost of $9,000. I will explain which one of these costs is fixed and which one is the variable. Then I will provide the cost per unit for each and along with that provide the total annual and unit costs of each when the sales volume increases. Following that I conclude with my own thoughts and views.

Fixed Cost and Variable Cost

The building rent cost is the fixed cost. Reason being is because the total annual cost of $9,000 for rent is not affected by the number of hamburgers produced. According to Horngren, Sundem, and Stratton (2005), "Even within the relevant range, the fixed cost remains fixed only over a given period of time--usually the budget period. Fixed cost may change from budget year to budget year solely because of changes in insurance and property tax rates, or rent levels."

The raw material such as cost for hamburgers is the variable cost. Reason being is because the cost of hamburgers does not stay the same at all times. It fluctuates so therefore cannot be a fixed cost. It can at times be a fixed cost on a temporary base.

Cost per unit:

Unit Cost = annual cost / units. Fixed; $9,000/1,000 = $9. Variable; $650/1,000 = 0.65.

Total annual costs:

The total annual cost of the fixed cost with an annual sale of 6,000 or 8,000 units remains the same at $9,000. The total annual cost of the variable cost with an annual sale of