Question

Explain the difference between variable cost, fixed cost and mixed cost. What causes changes in these costs? What makes them increase or decrease? Give three examples of each and explain how each example meets the criteria of fixed, variable and mixed.

Answer 1

Variable cost is the cost which is to be incurred with each additional unit of production( ie the additional cost incurred to produce one additional unit ). variable cost is constant per unit and increases as the number of units produced increases.

3 Examples of variable cost : Direct material , direct labour, direct expenses  etc as all these costs are incurred per unit of production so they are called as variable costs.

Fixed costs are those costs which are fixed for a period irrespective of units produced ( ie these costs are to be incurred whether you undertake production or not ) fixed cost is constant for the period and decreases as the number of units increases.

3 Example of Fixed costs : Rent , salaries, fixed administrative overheads  etc since these cost are fixed and have to be paid irrespective of production units

Mixed costs is a combination of variable costs and fixed costs which may be in one of the following ways:

1.Expenses that do not change when there is a small change in the level of activity but changes whenever there is a slightly big change Eg no change in expenses if output increases by 10% but increases by 5% for increase in output beyond 10%

2. Expenses that change in the same direction as the change in level of activity but not in the same proportion Eg: an expense may change by 1% for every 2% change in activity.

3. Expenses which remain fixed upto a particular level and thereafter become variable or vice- versa

Examples are Telephone bill , electricity bill and delivery van expenses as these cost are fixed upto a limit and become variable or vice versa without a proportionate relation ship so these costs are called as mixed costs