In the problem identified, the items that fall under the category of fixed costs are the costs that are associated with the item of building rent — the total annual cost of 9000. The reason for this is that the definition of a fixed cost is that it is an overhead costs that is paid by a principal or an agent that doesn’t change depending on the number of units that are sold, produce, or otherwise manufactured by a firm (Horngren, 1967). Therefore, because the annual cost of the building rent does not change depending on the number of hamburgers that are produced by the restaurant, this is classified under a fixed cost of accounting.
On the other hand, the raw materials — or the cost for hamburgers — of a total annual cost of 650 are considered under the classification of variable cost because, unlike fixed costs, the cost of raw materials — or sometimes called the cost of inputs, are variables that change depending on the number of units that are produced or sold by the company. Unlike fixed cost, variable costs change depending on the number of units. Such variable costs may either be constant — linear — or marginal, a kind of production function which reflects economies of scale where in variable costs become cheaper as production increases because of improvements in the production process and efficiency.
If there are 1000 units that are produced, and 650 is the annual cost of the raw materials, then the cost per unit is .65.
Because .65 is a constant cost of raw materials, and 650 is the cost for 1000 units, then producing 6000 units would entail a cost of 3900, and producing 8000 units the following year would entail a cost of 5,200. These are the variable costs of producing the hamburgers. However, the fixed cost of 9000 for the building rent per year remains the same — and this is why it is considered to be a fixed cost.
References:
- Horngren, C. T. (1967). Cost Accounting: a Managerial Emphasis [by] Charles T. Horngren. Prentice-Hall.
