Posted: January 25th, 2023

630 Wk2 Db1 Res

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In regards to Judy Koch’s statement I believe it is due to the fact that there are very few “true” fixed or variable cost and this is due a constant changing in activity or cost drivers. These cost are labelled semivariable and semifixed cost. According to Schneider (2017), “Semivariable costs change but not in direct proportion to the changes in output” (sect.1.5). While semifixed costs by step increases in cost gradually over a period of time.

Variable costs are caused by changes in business activity that is in excess of the fixed rate and a fixed rate is a constant charge. These rates will not fluctuate even if activity does.

I have a real-life example that affects my work every quarter. One of my main job duties is handling the lease accounting portion of the company. Every quarter we have to do a disclosure of variable expenses on our lease assets. Take a drilling rig for example. You have a standard day rate that the company will be charged no matter the circumstances, but in reality we are billed a much higher rate than the day rate. The difference in the day rate and the actual cost is the variable portion. These costs are usually due to additional equipment charges, personnel, etc. that had to be called to the site. The activity and unforeseen circumstances causes a variable component in these assets.

Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.) [Electronic version]. Retrieved from

Respond to…

Controller, Judy Koch, in a recent speech said, “I rarely see a real variable cost or a truly fixed cost.” What did she mean?

Managers must be able to distinguished and manage variable and fixed costs in order to make educated decisions and responsibly react to changes within the business and market.  The differences between the two is that variable costs are those expenditures that change in response to changes in business activities, while fixed costs are constant regardless of business activity level changes (Schnieder, 2017). In regards to Judy Koch’s comment, I believe that she implied that in business costs are continuously changing for numerous reasons.  Because of the ongoing variations of costs makes pinpointing actual variable and fixed costs. 

Such expenses like raw materials and labor are considered variable costs and mortgages or rent; insurance costs and utilities are all considered fixed costs.  However, it is possible for variable costs not to change and for fixed costs to change and can be a direct result of a manager’s decision making.   For example, if a company sets a max rate of production of units and through the manager’s behavior and how they handle the costs associated with that production amount and the employees than that rate can be maintained and stay steady and be able to maintain the same cost for materials and labor then those costs can almost appear as fixed costs.  The same can be done with costs that are usually considered fixed such as advertising or utilities.  In the case of advertising it can be allocated as a discretionary fixed cost. These costs are those that managers can decide to spend or decide to not spend (Schneider, 2017).  If a company usually budgets $5,000 a month to advertising but decides to only spend that amount if demand decreases that cost could be seen as a variable costs.  Utilities are usually considered as fixed costs as well, however as business ramps up or slow downs the amount of electricity, water, heat, etc. will go up and down dependent on how much is used.  Therefore that cost is changing dependent on output levels.      

References:

Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors(2nded.) [Electronic version]. Retrieved from

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