Define variable, semi variable, fixed and semi fixed which is traditionally used in cost accounting.
Define the above terms and subsequently describe the terms based on the business structure that is a car manufacturer introducing a new engine.
In cost accounting, the terms variable, semi-variable, fixed, and semi-fixed are used to classify different types of costs incurred by a business. Let's define each term and then discuss how they relate to a car manufacturer introducing a new engine.
1. Variable Costs: Variable costs are expenses that change in direct proportion to the level of activity or production. They vary as the volume of output changes. Examples of variable costs in a car manufacturing context could include the cost of raw materials, direct labor needed to produce the engine, and electricity consumption in the production process. To determine the variable cost per unit, you would divide the total variable cost by the number of engines produced.
2. Semi-Variable Costs: Semi-variable costs (also known as mixed costs) consist of both fixed and variable components. These costs have a fixed portion that remains constant over a certain volume of activity and a variable portion that changes with the level of activity. For a car manufacturer introducing a new engine, an example of semi-variable cost could be the salaries of production supervisors. The base salaries of supervisors are fixed costs, but they may also receive a bonus or overtime pay, which is variable and dependent on the level of production or engine units produced.
3. Fixed Costs: Fixed costs are expenses that do not change with the volume of activity or production level. These costs remain constant over a specific period, regardless of the number of engines produced. Examples of fixed costs for a car manufacturer could include facility rent, insurance, property taxes, or a portion of management salaries that are not tied to production.
4. Semi-Fixed Costs: Semi-fixed costs (also known as step costs) are fixed costs that remain constant within a certain range of activity levels, but may increase or decrease when the volume of activity crosses a specific threshold or step. For a car manufacturer introducing a new engine, an example of semi-fixed cost could be maintenance and repairs on production equipment. As long as the production remains within the existing capacity limits, the cost might stay fixed. However, if the production exceeds certain limits, additional costs may be incurred to repair or upgrade the equipment.
It's important to note that these cost classifications can vary depending on the specific circumstances and accounting practices of different businesses.