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Cost Accounting: What Are the Four Types of Costs: Fixed, Variable, Semi-Variable, and Step? 25 Views
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Description:
What are the four types of costs: fixed, variable, semi-variable, and step? Fixed costs are costs that don’t change no matter how much production changes (things like rent or mortgages). Variable costs are the opposite, as production changes, so do they (raw materials and supplies). Semi-variable costs are fixed within a certain range of output and then change to variable when that output is reached and exceeded. Step costs are similar to variable costs in that they are fixed depending on levels of output; they are constant for a range of output and they jump (step) to the next cost level if output increases by that much. So, step costs are, let’s call them, fixed by output level costs.
Transcript
- 00:00
And finance Allah Shmoop What are the four types of
- 00:05
costs Oh all right Well lots of things come in
- 00:08
fours legal's the horsemen of the Apocalypse and Stooges you
- 00:12
know don't forget ship Okay so in practical reality these
- 00:16
concepts actually matter how so Well think about your personal
Full Transcript
- 00:20
budget The one you used to direct your day to
- 00:23
day expenses There are four universally accepted types of costs
- 00:27
for a regular person's budget rent Internet burritos and yes
- 00:32
video games Now think about a company As with your
- 00:34
budget well there are four types of costs that a
- 00:37
company has to consider the categories air well slightly different
- 00:40
though generally speaking of business has to keep in mind
- 00:42
these four kinds of expenses fixed variable semi variable and
- 00:46
step The categories correspond to how much the cost changes
- 00:49
When the amount of output changes you increase the amount
- 00:52
of stuff you make Well how much did that cost
- 00:55
change Not at all Well then it's a fixed cost
- 00:58
The cost changes proportionally with every increase in production Well
- 01:02
then that's a variable cost somewhere in between wealth And
- 01:06
that's semi variable or step Well you own a factory
- 01:09
that makes toothpicks for Gap tooth people made from exotic
- 01:13
hardwoods It's called the Dunaway Letterman Jack O Lantern company
- 01:16
Tough to fit on a mug but well you like
- 01:18
it You make one hundred thousand box of toothpicks a
- 01:20
month and you want to ratchet that number up to
- 01:23
one hundred twenty thousand boxes a twenty percent bump Well
- 01:26
how will the increased production effect costs Well the actual
- 01:29
cost will respond differently It depends on what category they
- 01:32
fit into Will all of the costs go up twenty
- 01:35
percent with this increase in production Yeah probably not Meaning
- 01:39
the company will scale You'll produce more and you'll have
- 01:42
higher profits So quick tour Here we go Fixed costs
- 01:45
don't change at all They stay the same no matter
- 01:47
how much you make that is fixed Like the toothpick
- 01:50
grinding floor the sawdust sucking system the factory building itself
- 01:55
fifty thousand units eighty thousand units a hundred thousand units
- 01:59
that fixed cost is all the same If you decided
- 02:02
to make eighteen million units Well then things would be
- 02:04
different But at this scale or this level it's all
- 02:07
fixed It's all the same The only big notable difference
- 02:09
is that the fixed costs and of the factory is
- 02:12
now amor ties over a larger number That is if
- 02:15
it cost twenty grand a month to rent that factory
- 02:17
and all the equipment in it If you made twenty
- 02:19
thousand toothpick boxes a month while the fixed cost per
- 02:23
box would be a buck if you made two hundred
- 02:25
thousand creep pick boxes in a month we'll then the
- 02:27
fixed cost per box would be a dime right That's
- 02:30
fixed It doesn't change month after month after month as
- 02:33
it Rikers and you basically save money when you have
- 02:36
big volume output Because the cost per fixed foot is
- 02:39
a flat variable costs are directly linked to the amount
- 02:42
of output Factories making and variable you know varies well
- 02:46
The increase in cost here is pro pie fortune All
- 02:48
make one more to thicken the variable cost increase accordingly
- 02:52
Why Well because you have to buy more raw wood
- 02:54
supplies to put through the system you have to run
- 02:56
the saws longer You have more sawdust to clean more
- 02:59
packing material to by someone Someone more Output demands more
- 03:02
input So think high brand fiber food something like that
- 03:06
okay Next semi variable costs have elements of fixed and
- 03:09
elements of variable costs Usually they have a fixed component
- 03:12
and a variable component like the electricity to run the
- 03:15
machine that puts the little plastic flew fi things at
- 03:18
the end of the toothpicks Turning it on takes a
- 03:20
certain amount of baseline electricity That part is fixed but
- 03:23
then running the machine takes a little extra electricity for
- 03:26
each flukey thing that gets installed That part is variable
- 03:29
so the cost of running the machine gets thrown into
- 03:31
the semi variable group A little bit fixed and a
- 03:34
little bit variable Got it Alright last category step costs
- 03:38
these increase in levels or scale The increase isn't proportional
- 03:42
as with variable cost but instead takes place in steps
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like step cost might stay the same One output rises
- 03:47
from one hundred thousand to one hundred twenty thousand boxes
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but then the one hundred twenty thousand and first item
- 03:53
causes the step cost to bump up The cost jumps
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up in chunks and it stays the same for a
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while But then a certain point moves it to a
- 04:00
higher level like you need a scale box Packer or
- 04:03
you need some other thing that handles ten thousand maur
- 04:06
twenty thousand fifty thousand more boxes because that's a whole
- 04:09
different scale set of demands than if you were just
- 04:11
packing a few hundred boxes You could do those manually
- 04:14
You don't need the high tech robots then to do
- 04:16
it right So it stayed same for a while as
- 04:18
a staff and then it reaches another production point and
- 04:20
then costs kind of zoom up well breaking down a
- 04:22
little more detail fixed Think Brent your toothpick factory cost
- 04:26
ten thousand month and rent It cost that much If
- 04:29
you meant no toothpicks it cost that much If you
- 04:31
make a thousand boxes of toothpicks and a cost that
- 04:33
much If you make one hundred thousand box of toothpicks
- 04:35
that rent is fixed it doesn't change To get the
- 04:38
most out of a fixed costs You want to make
- 04:39
his many things as possible As many Turbo Whittle five
- 04:42
thousand machines is you could fit into the factory Maximizing
- 04:45
volume production allows you to get the most out of
- 04:47
those fixed costs of rent per dollars spent Okay you
- 04:50
spent ten thousand dollars rent to make one toothpick while
- 04:53
that becomes a really expensive to pick right You have
- 04:55
to find someone to pay at least ten thousand dollars
- 04:57
for it plus all the other costs related to making
- 04:59
that one little wood sliver but make ten thousand or
- 05:02
one hundred thousand boxes of toothpicks and your rent expense
- 05:05
Well then is only a ten cents a box right
- 05:07
Next type variable The type of expense increases proportionally without
- 05:11
put raw material expense is a good example Each toothpick
- 05:14
needs so much African black wood or South American cedar
- 05:17
Yeah say you need three dollars worth of African black
- 05:20
wood to make ten boxes of toothpicks Still making one
- 05:22
box would cost thirty cents Making ten boxes will cost
- 05:25
three bucks and making one hundred thousand will cost thirty
- 05:28
grand and making one hundred thousand one boxes will cost
- 05:31
thirty thousand and three dollars of the African Blackwood stuff
- 05:35
right Because the same cost and no matter what volume
- 05:37
you order the cost goes up in what's called a
- 05:39
linear progression A straight line on a graph Labor can
- 05:43
also work this way but it depends on how you
- 05:45
pay your workers Pay them on a per piece basis
- 05:47
And it's completely variable Bob Splinter gets paid a penny
- 05:52
for every toothpick he makes He makes a thousand toothpicks
- 05:54
He gets a ten box He makes two thousand five
- 05:56
hundred twenty three toothpicks He gets twenty five dollars twenty
- 05:59
three cents It's completely variable but Bob joins the Toothpick
- 06:03
makers local one forty two Their contract calls for an
- 06:06
hourly wage twenty five dollars an hour Plus Bob is
- 06:08
guaranteed forty hours a week Well now his wages aren't
- 06:12
fixed at a grand A week there It doesn't matter
- 06:14
how many toothpicks he makes in an hour Bob gets
- 06:17
the same amount no matter what So if you can
- 06:19
get more efficient with production if you can figure out
- 06:21
how to make more per hour we'll then you Khun
- 06:23
Stretch the labor cost Mohr Just as with the rent
- 06:26
costs while you're proportional per unit cost will go down
- 06:29
the more you make in the same amount of time
- 06:32
on two semi variable elements of both fixed and variable
- 06:34
cost Think about the pay for a sales person with
- 06:36
a fixed salary of fifty grand a year to your
- 06:39
sales associate You also give them a bonus of two
- 06:41
dollars per ten boxes sold So each additional ten box
- 06:45
units sold carries a two dollars variable cost to you
- 06:48
related to commission But the salary is a fixed cost
- 06:51
It gets relatively less expensive per unit with each additional
- 06:55
sail Right You're going to pay fifty grand no matter
- 06:57
what if the sales person sells ten boxes in a
- 06:59
year Well the sales cost for that unit is fifty
- 07:02
thousand two dollars The full salary plus the two dollar
- 07:05
commission yet really expensive Yeah You just pay the salesperson
- 07:08
five thousand dollars in twenty cents for each box of
- 07:11
toothpicks they sold Yeah that was a bad deal If
- 07:13
they sell ten thousand boxes will Now the overall cost
- 07:16
is fifty two thousand for the year fifty grand in
- 07:18
salary and two grand for the total commission for those
- 07:20
thousand units Your paying Mohr on an absolute basis but
- 07:23
the per box amount is much better now You pay
- 07:26
just five twenty per box Okay so let's look at
- 07:29
the big winnings Compensation for one hundred thousand boxes sold
- 07:32
in a year Total cost goes up to seventy thousand
- 07:36
again Maurin Absolute basis Fifty thousand salary twenty thousand Commission
- 07:39
But now the per box costs just seventy cents Lastly
- 07:42
there's the step category Instead of a per unit commission
- 07:45
you offer your salespeople a bonus when they hit a
- 07:48
certain level If they sell a hundred thousand units they
- 07:50
get a twenty thousand dollar bonus So sales one through
- 07:53
ninety nine thousand nine hundred ninety nine while the sales
- 07:55
person earns fifty grand for the year on sale number
- 07:58
one hundred thousand They earned seventy thousand for the year
- 08:01
fifty grand in salary And you know the twenty grand
- 08:03
bonus that hundred thousand sail becomes very expensive for you
- 08:08
may be worth it to incentivize your sales force though
- 08:10
so you gotta think about that stuff But because of
- 08:12
the structure of strategy surrounding step costs are often different
- 08:15
than the other three categories Right Did you get that
- 08:17
big step function when they hit their next level of
- 08:19
bonus For each of the other categories it's better to
- 08:22
make output as high as possible Or in the case
- 08:24
of variable costs it's at least neutral Assume you sell
- 08:27
everything you make and that making tons of stuff doesn't
- 08:30
force prices down Well then given your ability to sell
- 08:33
everything and maintain pricing levels It's more profitable to make
- 08:36
a cz much as possible with fixed and semi variable
- 08:38
costs for each of those categories the per unit cost
- 08:41
goes down with each additional toothpick you make The per
- 08:43
unit cost of variable expenses states the same but it
- 08:45
doesn't cost any more at least on a relative basis
- 08:48
to make more So why not make more especially as
- 08:50
you're fixed and semi variable cost get relatively cheaper Is
- 08:54
output increases right Well step costs work differently as you've
- 08:56
seen there Khun B scenarios where it's more profitable to
- 08:59
not go to that next step and hopefully not have
- 09:01
to pay all those bonuses You Grinch In the case
- 09:04
of the sales bonus that hundred thousand unit comes with
- 09:06
a twenty thousand dollars sales price tag meaning that big
- 09:09
bump in commission to your sales force Well it might
- 09:12
be best just to make ninety nine thousand nine hundred
- 09:14
and nine boxes and call it a day But then
- 09:16
when the clock resets on the bonus well then you
- 09:18
start again at one sale Staff will not be happy
- 09:21
but well that one time you could save twenty grand
- 09:23
bonus and good luck with that That's not how the
- 09:25
real world works Is that bonus money worth a hostile
- 09:28
work environment create Yet Not for us to say You'll 00:09:30.462 --> [endTime] have Tio you know pick your own battles
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