Fixed & Variable Expenses: Impacts on Production Outputs Essay Example

The fixed and variable expenses are the primary type of prices that an organization incurs during the production of services and goods. Variable prices vary according to the quantity of output in production, while the fixed prices remain constant despite the amount the organization produces. Variable costs are the expenses of an organization that is in association with the production of services or goods. The organization’s variable expenses decrease and increase following the volume of production. When the volume of production increases, the variable expenses increase (Kaplan & Atkinson, 2015). The variable expenses vary from one industry to another.

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However, the variable expense is less predictable to the owner of the business or organization. Due to this, an organization must leave the room that will accommodate in case there is an increase in the variable expenses. For instance, if a company let us say A produces mugs and each goes for $2. If the organization manufactures 500 of them, the variable price is $1000. In case the organization does not manufacture any units, it lacks that variable expenses for the production of the mugs. Excellent examples of variable expenses are packaging, labor, raw materials, and commissions for production.

Fixed expenses are the costs that do not vary according to the production volume. The fixed expenses are similar despite the production of the services and goods or not. For this reason, the organization cannot prevent the fixed expenses. For instance, if a company let us say A rents equipment for about $5000 monthly for the production of the mugs (Kaplan & Atkinson, 2015). In case the organization fails to manufacture mugs on a particular month, it still needs to pay for the equipment. Even if it gets $1 million, the renting expense is still the same. Some of the excellent examples of the fixed expenses are utilities, interest payments, insurance, and rent payments.

Two factors are also applicable in differentiating the fixed and variable expenses. The first one is break-even analysis, which helps an organization to know their pricing and answer some essential questions like feasibility. The equation of the analysis is the volume needed to break even fixed costs/ (price-variable costs). Through understanding the variable and fixed expenses, the organization can identify the scale of economies (Kaplan & Atkinson, 2015). Through the two, an organization can make rational decisions to enhance profitability.

In my case, I would prefer fixed expenses for an organization. It is because it enables a profit increase due to the revenue increase that is applicable on a constant price level. It is an essential section of break-even points of calculations and profit projections of a project or business. Also, fixed expenses are useful in the measurement of performance. It enables an organization to observe the changes that happen from one month to another.

Moreover, it maintains low costs hence enabling an organization to make strict rules as well as follow them. Also, it can easily be budgeted (Kaplan & Atkinson, 2015). It enables the company to know how the costs will be over a certain period, and in case of an increase in the production, the budget accommodations are not necessary. The fixed cost is useful because it also applies to small businesses.

Conclusion

In conclusion, the cost is essential because it enables a company to determine the exact quantity of sales that the clients have purchased or sold. It is due to this reason that an organization should take the initiative to understand the different costs and how they change according to the volume of production. Through understanding, the organization can then determine the expenses that are appropriate for them and work with it effectively.

References

Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.

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