Page 148 - Finance for Non-Financial Managers

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Cost Accounting
because we’re trying to
understand how costs
that essentially remain
behave in certain circum- Fixed costs Those costs 129
unchanged even though the
stances, for example: business increases its volume of sales.
Variable costs Those costs that
• If variable costs are
increase in direct relationship to sales
increasing faster
volume.
than sales, there is
Semi-fixed costs Those costs that
inefficiency in the
increase in relation to sales but at a
process that man-
slower pace. Semi-fixed costs have
agement needs to aspects of variable costs and also
identify and correct, aspects of fixed costs.
because variable
costs should never grow faster than sales under normal
conditions.
• If costs identified as fixed are rising unexpectedly as sales
grow, it is good to know that this should not be caused by
increasing sales volume, and the cause should therefore
be investigated.
• If costs identified as variable are not rising proportionately
with sales, the cause should be investigated, because
there may be unrecorded expenses that will distort report-
ing in the month being reviewed (costs too low) and in
the month when they finally get recorded (costs too high).
• Knowing these characteristics enables us to budget more
accurately, particularly if we are planning for the possibili-
ty of different levels of sales and must be prepared for
several possibilities. See Chapter 10 for a discussion of
flexible budgets.
However, it’s well to keep in mind this simple rule: All costs
are fixed in the short term and all costs are variable in the long
term.
In other words, regardless of the label you put on it, any cost
can be reduced by effective management, given sufficient time.
In the case of a company’s building lease payments, “sufficient
time” may mean at the expiration of the lease. Most costs can be