Variable Or Fixed Cost

Being able to determine whether a cost is fixed or variable is vital to the understanding of overhead loading and cost behavior. A fixed cost is unchanged with a change to the cost driver. (Horngren, Sutton, and Stratton p.46) Which means that a fixed cost does not rise with the change is production of your product. A good example of a fixed cost is rent. No matter how many widgets you make (within a relevant range) your rent will not increase. A variable cost, on the other hand, does change with the amount of production. A good example of this is raw materials. If you make more widgets you will need more raw materials to produce those widgets. So a variable cost changes in direct proportion in the cost driver level. (Horngren, Sutton, and Stratton p.46)

The given information is that company ABC produces 1000 hamburgers annually. To produce this amount they spend $650 in raw materials (hamburger) and the rent for the production facility is $9000 annually. With this information we can calculate the amount of raw material needed to produce one single hamburger $0.65. Using this we can calculate expected costs if production increases. For 6000 hamburgers annually the cost of raw materials is $3900 while at 8000 hamburgers it is $5200. Since the facility rent is unchanged with respect to the number of hamburgers. It's per unit cost decreases respectively. 6000 hamburgers is $1.50 per unit and at 8000 it is $1.13. Where as in the beginning the rent overhead is $9.00 per unit.

To produce 6000 hamburgers annually there would be $9000 in fixed rent costs plus $3900 in raw materials, totaling $12900 annually. To produce 8000 hamburgers annually there would be $9000 in fixed rent costs plus $5200 in raw materials, totaling $14200 annually.

6000 hamburgers would produce an annual per unit charge of $2.15. 8000 hamburgers annually would be $1.78 per unit.

Determining