Classification of Expenses - Marginal Costing

Posted Sat, 03/21/2009 - 23:38 by vasu

This article explains in detail about the different types of expenses in Marginal Costing (which are Variable expenses, Fixed expenses and Mixed expenses), how these marginal costing expenses change and how these expenses are related to improving profits at a company.

Table of Contents [hide]

Introduction
Variable Expenses
Fixed Expenses
Mixed Expenses
How Expenses Change?
To improve the profits at a company

Introduction

Expenses can be classified according to how they react to a change in revenues.

Three classifications of expenses are:

Variable Expenses
Fixed Expenses
Mixed Expenses

Variable Expenses

Variable expenses tend to vary directly with volume of output and change in total as volume changes.

A sales commission is considered to be a variable expense.

For example, sales staff commissions equal to 10% of sales.

When sales are $50,000 sales commission expenses are $5,000 and when sales are $70,000 the commission is $7,000.

With a variable expense the amount per unit (or the percent) stays constant.

In this case it's 10% -- but the total expense will vary with the sales volume.

Another example, the company pays $7 for a particular shirt and then sells the same shirt for $10.

When sales are $100, the cost of goods sold is $70; when sales are $10,000, the cost of goods sold is $7,000.

Other variable expenses could include delivery expenses, wages in the shipping department, and shipping supplies used such as boxes, shrink wrap, etc.

Variable cost per unit = Difference in cost

Difference in Activity Level

Fixed Expenses

If a company rents retail space for $2,500 per month, the rent remains at $2,500 whether the sales are at an all-time high or an all-time low.

If the company owns the Building, the building taxes remain the same whether sales are high or low.

Other examples of fixed expenses include salaries, insurance, telephone book advertising, and most depreciation.

If sales were to increase by a huge percentage, some fixed expenses might change.

For example, if sales doubled it is likely to cause an increase in rent expense.

Mixed Expenses

Mixed expense are partially fixed and partially variable. Otherwise it is a combination of a variable and a fixed expense.

For example, a company employs a sales person who is paid a basic salary of $2,000 per month plus a 2% commission on all sales.

The basic salary is a fixed expense; The 2% commission is a variable expense.

Taken together, the salesperson's compensation is considered a mixed expense.

Some mixed expenses do not correlate with sales.

For example, a salesperson uses his car to make sales presentations to customers.

Expenses such as insurance, licenses, parking, and some depreciation are all fixed expenses. They stay the same within a reasonable range of miles driven, or regardless of the amount of sales.

Some vehicle expenses, such as gasoline, oil changes, tires, and other maintenance will vary with the number of miles driven.

But, these expenses may or may not vary with sales.

A statistical tool called regression analysis is used to determine

How much of a mixed expense is fixed and
The rate at which the variable portion of a mixed expense will change as some activity changes.

How Expenses Change?

As a company's sales or revenues increase, some of the company's expenses will increase and some expenses will not change.

For example, if a company sells a few additional products on which it pays a sales commission, the company's cost of goods sold will increase along with its commission expenses.

On the other hand the salaried officers of the company and the company rent will not increase even a penny with the sale of a few more products.

To improve the profits at a company

Increase sales or revenues by an amount greater than the increase in expenses
Decrease expenses by an amount greater than a related decrease in revenues

{BLOCK:relevant_content:1}

Categories:
- Marginal Costing
- Management Accounting

Comments

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by Visitor - 11/13/2009 - 16:34

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Classification of Expenses - Marginal Costing

Posted Sat, 03/21/2009 - 23:38 by vasu

Table of Contents [hide]

Introduction
Variable Expenses
Fixed Expenses
Mixed Expenses
How Expenses Change?
To improve the profits at a company

Introduction

Expenses can be classified according to how they react to a change in revenues.

Three classifications of expenses are:

Variable Expenses
Fixed Expenses
Mixed Expenses

Variable Expenses

Variable expenses tend to vary directly with volume of output and change in total as volume changes.

A sales commission is considered to be a variable expense.

For example, sales staff commissions equal to 10% of sales.

When sales are $50,000 sales commission expenses are $5,000 and when sales are $70,000 the commission is $7,000.

With a variable expense the amount per unit (or the percent) stays constant.

In this case it's 10% -- but the total expense will vary with the sales volume.

Another example, the company pays $7 for a particular shirt and then sells the same shirt for $10.

When sales are $100, the cost of goods sold is $70; when sales are $10,000, the cost of goods sold is $7,000.

Other variable expenses could include delivery expenses, wages in the shipping department, and shipping supplies used such as boxes, shrink wrap, etc.

Variable cost per unit = Difference in cost

Difference in Activity Level

Fixed Expenses

If a company rents retail space for $2,500 per month, the rent remains at $2,500 whether the sales are at an all-time high or an all-time low.

If the company owns the Building, the building taxes remain the same whether sales are high or low.

Other examples of fixed expenses include salaries, insurance, telephone book advertising, and most depreciation.

If sales were to increase by a huge percentage, some fixed expenses might change.

For example, if sales doubled it is likely to cause an increase in rent expense.

Mixed Expenses

Mixed expense are partially fixed and partially variable. Otherwise it is a combination of a variable and a fixed expense.

For example, a company employs a sales person who is paid a basic salary of $2,000 per month plus a 2% commission on all sales.

The basic salary is a fixed expense; The 2% commission is a variable expense.

Taken together, the salesperson's compensation is considered a mixed expense.

Some mixed expenses do not correlate with sales.

For example, a salesperson uses his car to make sales presentations to customers.

Expenses such as insurance, licenses, parking, and some depreciation are all fixed expenses. They stay the same within a reasonable range of miles driven, or regardless of the amount of sales.

Some vehicle expenses, such as gasoline, oil changes, tires, and other maintenance will vary with the number of miles driven.

But, these expenses may or may not vary with sales.

A statistical tool called regression analysis is used to determine

How much of a mixed expense is fixed and
The rate at which the variable portion of a mixed expense will change as some activity changes.

How Expenses Change?

As a company's sales or revenues increase, some of the company's expenses will increase and some expenses will not change.

For example, if a company sells a few additional products on which it pays a sales commission, the company's cost of goods sold will increase along with its commission expenses.

On the other hand the salaried officers of the company and the company rent will not increase even a penny with the sale of a few more products.

To improve the profits at a company

Increase sales or revenues by an amount greater than the increase in expenses
Decrease expenses by an amount greater than a related decrease in revenues

{BLOCK:relevant_content:1}

Categories:
- Marginal Costing
- Management Accounting

Comments

bnatey

by Visitor - 11/13/2009 - 16:34

thankes

by ro7im - 12/10/2009 - 13:17

trading forex

forex rates forex rates

forex exchange forex exchange

finanzas forex

forex trade

forex online

forexfactory

traderforex

forexmarket

forex broker

forex broker

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Active forum topics

Classification of Expenses - Marginal Costing

Introduction

Variable Expenses

Fixed Expenses

Mixed Expenses

How Expenses Change?

To improve the profits at a company

Comments

bnatey

thankes

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Books

Browse Article Categories

User login

Featured Gallery Photo

DSC00505x

Active forum topics

Classification of Expenses - Marginal Costing

Introduction

Variable Expenses

Fixed Expenses

Mixed Expenses

How Expenses Change?

To improve the profits at a company

Comments

bnatey

thankes

Post new comment