What Is Management Accounting

Variable costs are expenses that change in direct proportion to the activity of a business while the per-unit cost remains constant. For example, cost of goods sold, sales commissions, shipping charges, delivery charges. Fixed costs are expenses whose total does not change in proportion to the activity of a business. For example, a retailer must pay rent and utility bills irrespective of sales volumes.

For this example, we will be running a restaurant and analyze the fixed and variable costs associated with changes in sales. We will determine the cost per unit when sales are 1000 units, 6000 units and 8000 units respectively. The initial data given is:

• Item: Raw Materials (cost for hamburgers)

• Total Annual Cost: $650

• Item: Building Rent

• Total Annual Cost: $9000

The table below shows the cost per unit for each sale point (yellow highlights show amounts that were solved for):

Sales Volume Total variable (hamburgers) Variable

per-unit Total fixed (Rent) Fixed

per-unit

1000 $ 650.00 $ 0.65 $ 9,000.00 $ 9.00

6000 $ 3,900.00 $ 0.65 $ 9,000.00 $ 1.50

8000 $ 5,200.00 $ 0.65 $ 9,000.00 $ 1.13

The variable expense per unit would be figured by dividing the total variable expense by the number produced. In this example, $650 / 1000 yields a per-unit cost of $0.65. Therefore, in order to pay for the raw materials, each of the 1000 hamburgers would need to be sold for at least $0.65. In the same light, in order to pay the rent for the building (fixed cost) each of the 1000 hamburgers would need to be factored in to the cost of rent: $9000 / 1000 yields $9.00 per-unit to pay the fixed cost. To find the total variable cost when our sales increase to 6000 units, we multiply the constant, $0.65 by the total units. Working backwards, this gives us a total variable annual cost of $3900 for 6000 units. The amount then needed to be contributed per unit for the fixed