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To help students better understand account principles, they are often introduced to costs as being fixed or variable. In reality, many of the costs that businesses incur fall in the middle; in essence they are mixed costs.
Variable costs are the type that increase or decrease depending of the level of activity being undertaken. For example a drink company normally will not spend money for juice concentrate if it isn’t making drink products, but can expect the sum that it pays to its suppliers to rise in direct proportion to the amount of drinks it makes. Therefore, management will not need to worry about incurring variable costs if operations are temporarily shut down.
On the other hand, fixed costs remain constant with little regard to the level of production being realized. A good example of fixed costs is rent. Of course there are exceptions, but whether or not a company is using the full capacity of the facility it is renting, the rent will still become due. However, a positive characteristic of fixed costs is that they usually remain constant; and so everything that is earned after the break-even point is reached increases profit margin.
It is important to note that fixed costs aren’t always fixed. In fact, they only stay constant within a production or activity range. For example, the cost of renting a space that can hold enough machinery to produce 100K units max will move upward if production capacity needs to be increased to 200k.
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Mixed costs are really a marriage of both fixed and variable costs and therefore are also known as semi-variable costs. In essence, there is a portion of the expense that is fixed and another component that causes the expense charge to go up or down depending on production levels. Here are some examples of mixed costs:
Salesman’s salary – Base salary plus commissions on sales
Book printing cost – Typesetting and graphics works are fixed costs, while paper and ink costs are variable costs.
Performance based wages – These are employment wages that are based on the work hours of employees plus a base pay.
Utility bills – Where there is some form of line rental or service charge in addition to the usage charges.
X-Ray services – X-Ray technicians' salary and depreciation cost are fixed, while the cost for film, powder and electricity are variable.
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While there are pure examples of fixed and variable costs, in reality many expenses have a component of both. This gives management a more complex equation to work with in determining how to control costs and increase revenues. Whatever the case, management can find ways to use the characteristics of the different types of costs to their advantage.
“Examples of mixed costs and variable costs " Phillippe Put