Management Accounting and Variable Costs Essay

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ACC350-1302A-04
Phase 2 Project

In managerial accounting there are two types of cost information, variable and fixed costs. Variable costs are costs that change when some variable used in the cost to produce a product changes. For example if you were in the business of producing knives, then the price of the metal used to manufacture those knives would be your variable cost. Another variable cost that has to be accounted for in the cost of manufacturing is labor costs and supply costs. So the variable cost for each knife manufactured would equal the variable cost of metal + the variable cost of labor + the variable cost of supplies. Once you have calculated those costs you can take the total and multiply it by the total number of knives you wish to manufacture and you have your variable cost of knives.
Fixed costs are costs that are not dependant on materials used in manufacturing and are dependent on an amount of resource that is required. An example of a fixed cost would be depreciation expense or salaries paid.
Cost information can determine many variables in a company, the first variable being pricing of products. In most businesses the market determines the price and supply and demand play a big role in this determination. If supply is low and demand is high the price will most likely be a lot higher than if supply is high and demand is low. Businesses also use cost plus pricing where and organization can set its price according to product cost.
Budgeting is also a major factor that accountants use to determine costs and pricing. Budgets are important in planning, forecasting production levels and monitoring sales activity.
Variable costs and fixed costs go hand in hand with budgeting and price planning. Since variable costs can change from time to time accountants are always monitoring variable costs so they can determine what needs to be spent and how much to spend.
Cost-Volume Profit Analysis is used by
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