What Is Management Accounting?

Costs can be classified into two categories, fixed and variable costs. These costs behave differently based on the level of sales volumes. Suppose we are running a restaurant and have identified certain costs along with the number of annual units sold of 1000.

Item: Raw Materials (cost for hamburgers)

Total Annual Cost: 650

Item: Building Rent

Total Annual Cost: 9000

Identify which cost item above is fixed and variable and why? What is the cost per unit of each? Suppose we increased our sales volume to 6000 units and then to 8000 units the following year (and are still within the relevant range), what would be the total annual cost and unit cost of fixed and variable costs?

Introduction

Costs can be classified into two categories, fixed and variable costs. These costs behave differently based on the level of sales volumes. Suppose we are running a restaurant and have identified certain costs along with the number of annual units sold of 1000.

Item: Raw Materials (cost for hamburgers)

Total Annual Cost: 650

Item: Building Rent

Total Annual Cost: 9000

Identify which cost item above is fixed and variable and why? What is the cost per unit of each? Suppose we increased our sales volume to 6000 units and then to 8000 units the following year (and are still within the relevant range), what would be the total annual cost and unit cost of fixed and variable costs?

First, we must understand the definitions of fixed and variable cost in order to identify them. "Fixed cost is a cost that is not immediately affected by changes in the cost-driver level. Variable cost is a cost that changes in direct proportion to changes in the cost-driver level." (Horngren, 2005)

According to the definitions and the scenario we were given of running a restaurant the cost of the Item: Raw Materials (cost of hamburgers) are a variable cost that changes in direct proportion to changes in the cost-driver level. Why, is this, a variable

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