![]() Discussion of fixed and variable costs The classification of fixed and variable costs makes room for difficult discussions, especially between decision makers (managerial economics) and accountants (financial control/management accounting), as the decision-making occasion in a control-situation is not as variable as in a decision-situation.Regarding the time horizon, the main point is that it is necessary to remain focused and constantly attentive to the applicable time horizon.ĭifferent time horizons and decision-making situations result in different costs for the same production. if the management in a minor retail chain plans the pricing strategy for the next year, while simultaneously a reaction to the competitors' "birthday-promotion" has to be laid out for the following week. Consequently, the time horizon is a decisive determinant for the specific decision-making occasion and it is fundamental that the time horizon is applied consistently.įurthermore, it is important to be aware that mostly firms decide on the short-term and long-term simultaneously e.g. Of course there are a number of terms and techniques that apply in both long-term and short-term cases. There exists a group of theories which are only applicable to the short-term, and another set of theories that only apply in the long-term. No matter how crystal clear this separation is, the reasons for decision-making must be analyzed before this distinction can be realized. One of the motivations for text is the facilitation of understanding that such a separation always has to be seen in relation to the relevant decision-making situation. The late owner of the travel agency Spies said: "Even if we only get 1 DKK for the last seat to Mallorca, it's better than an empty seat." A product that has no value if it is not sold, has a cost of 0 DKK when it is to be sold. These are for the most components of the minimum costs that have to be covered by the sales price - unless the product has no value if it is not sold. Depreciation of machines and rent are fixed costs. O In the medium-short-term the materials employed and the production-workers' salaries are both variable costs, as long as the workers can hired or laid off with relative ease. The short-term production planning is also dependent on whether the goods used are storable. Even workers in production companies have a few weeks notice, although day laborers do exist. Worker salaries, depreciation of machinery, and rent are, in the span of a few days, fixed costs, as they do not adapt to the size of production. O In the extreme short-term, the materials employed in the production may be the only variable costs, as this employment increases and decreases with the slightest change in production. ![]() This fact is suitably explained by the costs of materials, workforce, machines, and rent employed in a production firm: Costs vary in conjunction with the time horizon. The time horizon is decisive when separating costs into fixed and variable costs. ![]()
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