What Percentage of Costs Are Variable? Math Problem Example

What percentage of costs are variable? How does volume affect variable costs?

Variable costs change according to the proportion of the amount of goods or services being sold and therefore cannot be calculated as a precise percentage. To calculate variable costs, it’s essential to consider the quantity of product that needs to be made, the amount of money available in the budget, and the fixed costs per product. Once the fixed cost is known, it is easier to determine the amount of products that could be produced based on the variable cost. Volume affects variable costs because the greater amount of products that are produced, the higher the variable costs will be; this relationship will proportionately increase as the number of products increases.

What are four major categories of costs?

The four major categories of costs are prevention costs, appraisal costs, internal failure, and external failure costs. Prevention costs are the costs that are are incurred in to minimize appraisal and failure costs. Appraisal costs include the costs that go testing and inspection of products. Internal failure costs are those that result in identifying defective products before they are distributed to customers. External failure costs are those that relate to defects found after delivery of the product to the customer and the need to rectify these errors.

What are two problems associated with assigning indirect costs to departments?

One problem associated with assigning indirect costs to departments is that production departments are prepared to handle issues that involve costs that are budgeted for. Assigning them indirect costs would be difficult to manage, because indirect costs are frequently not accounted for in the budget according to an itemized list. These indirect costs often include service department inefficiencies and the service departments cannot account for this, which is a second problem because it is difficult to keep track of costs that are not possible to budget for.

What are the three methods of cost allocation? What is the best method?  Why? (Please make sure you explain your rationale.)

The three methods of cost allocation include the direct method, the step down method, and the reciprocal method. Under the direct method, the allocation base attributable to the service departments are ignored; only the allocation base attributable to the operating departments is considered. The step down method allows the allocation of the costs of some service departments to other service departments, but once a service department’s costs have been allocated, no subsequent costs are allocated back to it. The reciprocal allows the allocation of service department costs to other departments. I believe that the best method is the reciprocal method because the other two methods don’t sufficiently account for indirect costs. The departments are primarily concerned with budgeted costs and the reciprocal methods allows participation amongst the departments to account for the indirect costs that could not have been foreseen.

What is the role of strategic planning in the budgeting process?  How does it differ from tactical and operation planning?

Strategic planning is a necessary part of the budget process because the strategic plan leads out the goals and the guidelines of the operation, while the budget process accounts for the items and costs necessary to achieve these goals. This differs from tactical and operation planning because tactical planning is essentially a breakdown of the strategic plan and includes a detailed list of steps that are needed to achieve each goal. Operational planning focuses on the production aspect of business and helps develop financial projections. Therefore, it is better to associate the budget with the strategic plan because it correlates more closely with the final goals of the project.

What is the correlation between planning, budgeting and control?

Planning, budgeting, and control are all related topics. The budget is an itemized list of materials and expenses necessary to meet the individual goals listed in the plan, while control measures whether these goals are met and provides a need for a course of action to adjust the plan if they are not. It is essential that room in the budget be left for control because checking the success of the plan is necessary at many stages of development. This step can also adjust the plan by pointing to adjustments that may be more beneficial. Ultimately, these three factors are involved in a cyclical relationship.