Question

Why would a financial manager want to distinguish between fixed and variable cost in the income statement?

Answer 1

A Financial manager needs to distinguish between fixed and variable cost in the income statement due to the following reasons;

• Variable costs are varied/change depending on the level of the Entity's Production volume while fixed costs have no relation and do not change as per production volume.
• When the level of Production decreases Variable costs will decrease proportionately, while fixed will remain the same and those are indifferent with the volume of production.
• Classifying the costs in the income statement either variable or fixed is important and users might check the statement of Cost of Goods manufactured and after that Cost of Goods Sold.
• by analyzing the variable and fixed costs finance manager might analyze the decisions have to be taken the business (like an investment in fixed assets)