Fixed and Variable Costs

For proper budgeting and cost control it is necessary
to make a distinction between fixed and variable total costs. Most costs fit easily
into one category or the other; however, various items of factory overhead can be
classified as semi variable costs and must be carefully examined to determine their
relationship to changes in the volume of production.

Fixed Costs:
Those which continue unchanged in total for a given period
despite wide fluctuations in volume or activity. There is a fluctuation in fixed
cost per unit with volume change. Examples of fixed costs are property taxes and
production executives’ salaries.

Variable Costs:
Those which change in total in direct proportion to changes
in volume or activity. There is a relatively uniform cost per unit with changes
in volume or activity. Direct materials and direct labor are generally considered
variable costs. Included in this category are such items as factory supplies and
payroll taxes.

Semi variable Costs: Those which vary but not in direct
proportion to volume or activity. For example, the payroll department costs may
remain unchanged up to a certain number of production employees. Additional volume
usually requires additional production employees and causes an increase in payroll
costs. Other examples of semi variable costs are salaries of production department
foremen and heat, light, and power.