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.
Types of Costs
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.