Cost Behaviour

788 WordsFeb 5, 20114 Pages
Question: Explain why it’s important for most senior managers to have a sound knowledge of cost behaviour ie fixed costs, variable costs, semi-variable costs and sunk costs. Answer: Understanding cost behaviour helps manager in anticipation of changes in cost when there is a change in their activities like production, sales, inventory pile up etc. It provides good assistance in planning, cost management and decision making. A number of behaviour patterns exist ranging from fixed to variable and from linear to curvilinear. Many cost predictions techniques are used to forecast sales and costs or any other factor. Profit planning has two main questions: (1) how much sales and (ii) what cost? First question can be answered by simply…show more content…
For example, as number of units produced would increase so would be the direct material & labor costs. As sales increase so the sales commission which is based on certain percentage of sale say 5%. If a company want to decrease its variable cost, it should start from reducing wastage as far as possible. Further decrease can be made through introduction of modern technology through size reduction ( as in printed circuits ), switching over to cheaper raw material (paperboard from garbage) or recycling to reduce waste to zero. SEMI-VARIABLE COSTS There are certain costs which are partly fixed and partly variable. These can be described as semi-variable costs or semi-fixed cost or even mixed costs. All utility bills have a fixed factor and usage factor. One would receive a telephone bill even if not a single call was made during a particular month. A club would charge a minimum subscription even if one does not enter the club for months together. In industrial units, there are setup costs whether 10 items are produced or 1000. Semi-variable costs are split into two components i.e. variable and fixed. So ultimately, only two types, variable and fixed, would emerge. SUNK COSTS In economics and business decision-making, sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered. Sunk costs are sometimes contrasted with prospective costs, which are future
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