ACCOUNTING

Accounting Analysis

Accounting Analysis

Introduction

The purpose of this paper is to enlighten and identify the breakdown of the different aspects of costing. It attempts to differentiate the various costs that are used for the purpose of accounting analysis and decision making. It defines the fixed cost, variable cost, semi-variable costs as well as the mixed cost and explains there significance in costing. It further attempts to explain the concept of break-even analysis and its importance in decision making.

Sparklin Automotive Company

Sparklin Automotive Company (SAC) commenced business in the year 1930. It began its operations in the United States of America by supplying spark plugs to the automotive aftermarket and automotive manufacturers (OEM, the original equipment market). Sparklin Automotive Company recently introduced a new spark plug manufacturing process in the United States of America, which has enabled it to produce much higher quality spark plugs. These new spark plugs are guaranteed to last up to 100,000 miles. This new innovation in spark plugs by Sparklin Automotive Company proved to be very successful in the United States of America.

Part One: Identify and Define the Variable, Fixed, and Mixed Costs.

In order to identify the costs, it is important that the basic concept of these costs be known. Thus, the definitions are provided prior to the identification of Sparklin Automotive Company costs breakdown.

Variable Costs

Variable costs change with an increase or decrease in volume. Usually, variable costs are directly related to providing a service, for example, direct material and direct labour. In financial statements variable costs are referred to as program expense. Variable costs are directly proportional to the volume of production (Horngren et al, 2008). Moreover, any change in variable cost directly impacts the pricing of product or services of the company.

Fixed Costs

Fixed costs are usually indirect costs, which are not directly related to the delivery of a service. do not vary. Fixed costs do not vary much and stay the same over longer periods. These types of costs are those that are a function of time, or remain unchanged, are constant, even when there are large fluctuations in the volume of production, among these are: Rental of factory depreciation of fixed assets in a straight line or coefficients, Cost Accountant's salary, insurance, salaries and wages of the porter, and so on. However, if a company install new machinery or plant, the increase in depreciation will be treated as a fixed overhead, and thus, fixed cost will increase. In contrast, this increment in the fixed cost will then stay constant until new machinery is purchased (Guilding, 2009). There are 2 basic kinds of fixed costs: Discretionary fixed cost and committed fixed costs:

Discretionary Fixed Costs

These are likely to be modified, such as salaries, rent of building, etc.

Committed fixed costs:

Committed fixed costs include sunk costs, such as depreciation of machinery.

Semi-variance Cost

The concept of fixed costs and variable costs have already been explained, however, there are some costs that behave differently. They are partially fixed and partially variable and thus, are termed as semi-variable fixed costs (Drury, ...