Variable Costs & Fixed Costs

Identifying activity variable costs and fixed costs can be challenging. Many times, managers and accountants require an in-depth analysis to manage costs. According to the video: Classifying Costs for Decision Making, there are several costs such as electricity, that are difficult to tie accurately to a product K. (Director). Once managers determine these correlations between cost and product, they can then anticipate and create models to forecast activity levels that impact efficiency and profits.

Being able to predict the impact of changing costs is cost management K. (Director). Decision making for cost management must encompass relevant information. Categories for costs include, fixed and variable costs, differential cost, opportunity cost, sunk cost, direct and indirect costs. Allocating funds for changing costs due to rising and falling of certain activity is part of accounting systems and decision making. Normally, decisions are made that focus on covering relevant “fixed costs”.

SoloFlight a professional flight training school located in Houston, TX utilize Ellington Airport for flight operations. This aviation firm offers cutting edge technology in both aircraft and simulators to help you learn to fly WELCOME TO SOLO. (2012). Their costs driver is students flown/trained. Fuel costs are variable with respect to solo miles flown. Flight time sold is also a variable cost which determines how much staffing/pilots are needed for peak seasons.  Fixed costs include use of facilities and structure; renting the air hanger space, contracted cleaning personnel and simulator maintenance. Variable cost also may include utility expenses, air simulator repair, and electricity to run simulators.  

Management is interested in cost behavior within the company’s relevant range, the range of activity within which management expects the company to operate R. W., & Platt, D. E. (2016). Weather forecast (an uncontrollable variable) depicts business efficiency as well. Regardless of how well a business is running, fixed costs do not go away. Advertising & promotion on websites such as Groupon deals and creating gift bundle packages are all part of discretionary costs for SoloFlight.

As activity at SoloFlight increases so do the instructional pilots. This expense is categorized as step-variable Costs. Understanding the relationship between cost and activity is cost behavior. Since SoloFlight’s cost driver is students flown/trained available funds are given priority to the step-variable costs of instructional pilots.  The company normally experiences a cost pattern or a flood of clients needing to reach deadlines for military applications or FAA private pilot certifications and instrument ratings in the spring and summer seasons. Their plane inventory, a Diamond Star DA40 and Cessna 150 correlate as sunk costs that can’t be changed. Planning for future operations shouldn’t be hard for this firm due to the identified sunk costs and defined cost driver to cover direct period costs.

Resources:

K. (Director). (n.d.). Classifying Costs for Decision-Making [Video file]. Retrieved April 13, 2017, from https://erau.instructure.com/courses/60672/pages/4-dot-3-video-classifying-costs?module_item_id=3121940

R. W., & Platt, D. E. (2016). Managerial Accounting Creating Value in a Dynamic Business Environment (11th ed.). New York, NY: McGraw-Hill College

WELCOME TO SOLO. (2012). Retrieved April 13, 2017, from http://www.soloflighttraining.com/