Fixed Costs in an Organization

Fixed costs are the types of expenses in a business entity that do not vary with the
level of activities. An organization will incur the charge even if there are no production
activities taking place. Thus, an organization cannot avoid fixed costs regardless of whether
the business is in operation or not. An example is leasing business premises. The
management will have to pay the lease amount even if they don’t operate daily, or the
business has been affected negatively. Variable costs as the level of production changes. An
increase in production level leads to a rise in the variable price (Oberhiolzer & Ziemerick,
2012). Thus, a variable cost may increase or decrease depending on the volume of
production. Also, variable costs vary depending on the type of industry. It will not be fit to
compare the variable costs of car manufacturers and an appliance organization. A mixed price
is a combination of both variable and variable costs. An example is telephone expenses,
where fixed costs like the line rent and the rates of subscriptions. However, variable costs
will depend on the time that an individual spends on the line.
Direct material refers to the items that have not undergone the manufacturing
process. Examples include Iron ore in a steel company. However, there might be materials
that are part of the finished products but cannot be directly traced back to the production
process. Such materials form indirect materials in the company. Direct labor is the work cost
for the workers operating on a material that can be converted into finished products. An
example is the salary paid to construction workers (Oberhiolzer & Ziemerick, 2012).
Manufacturing overhead is an accumulation of the cost incurred in making a finished product.
Examples include the repair and maintenance cost of a machine. There is a variation between
overhead costs and administrative expenses. The overhead costs need to be part of making the
products, while the administrative fee will result from running the business venture. Non-

UNIT 2 – DISCUSSION BOARD 3
manufacturing charges are incurred outside the boundaries of the production unit of an
organization. An example is a cost incurred during selling and distribution.

UNIT 2 – DISCUSSION BOARD 4

Work Cited

Oberhiolzer, M., & Ziemerick, J. (2012). Cost behavior classification and cost behaviour
structures of manufacturing companies. Meditari Accountancy Research, 12(1), 179-
193.