![]() If erasers cost 20 cents each, the variable eraser cost of making 1,000 pencils is $200 (1,000 X $.20). If you make 5,000 pencils you need 5,000 erasers. If you make 1,000 pencils you need 1,000 erasers. So erasers are a variable cost of making pencils. ![]() For example, if you are a pencil maker, you need an eraser for each pencil you make. Variable costs are those costs that vary directly with the amount of production. So, for decision-making purposes, costs are categorized as either fixed or variable. For example, the depreciation on an ethanol facility is the same regardless of whether the facility is operated at 75% of capacity or 100% of capacity. Fixed costs remain the same regardless of the amount of production. A cost is a variable cost if it increases (decreases) as the volume or production levels increase (decrease.) For example, the amount of a raw material used in the production process increases as more units of a product are produced (more corn is used to make more ethanol.)įixed costs do not change with changes in production. They are classified as either variable or fixed.Ī cost is variable or fixed depending on whether the amount of the cost changes as the volume of production changes. For this purpose, costs are categorized into two basic types. However, using costs for decision-making is much different. Categories such as advertising cost, administrative costs, labor costs and many others are used that help identify the type of cost. When accountants prepare financial statements of past performance, they use a variety of categories for recording costs.
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