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Describe how the firm where you work, or any business firm you are familiar with, distinguishes between fixed and variable costs. Provide specific examples.
In addition, explain whether fixed cost items or variable cost items get any priority in the firm’s internal decisions to distribute available funds.
If you are not directly involved in managerial accounting, you may want to discuss these questions with a Chief Financial Officer and share the information with your classmates.
If you do not want to address this discussion topic from the perspective of the firm where you work, please discuss from the perspective of how any firm operating in the aviation industry might address this topic.
Tie your answer to the eBook and also reference an external academic source.
In your response post, comment on how your analysis agrees with or differs from your classmate’s analysis. Share any additional resources that could help with this analysis.
Discussion 4.1 Mixed Costs
Summary post (100 words(10%)
Response post (100 words each; two or more responses, only 100 words total). Tie your answer to the eBook and reference an external academic source.In your response post, comment on how your analysis agrees with or differs from your classmate’s analysis. Share any additional resources that could help with this analysis.
Grammar and mechanics (10%)
Classmate responses
MY POST aka what i wrote posted Nov 5, 2024 4:36 PM
DISCUSSION 4.1 MIXED COSTS
In the aviation industry, companies consider two categories of costs – fixed and variable to allocate the funds for their needs. Overhead costs do not vary with the level of activity or the number of flights an airline runs; they are constant.” Some examples of fixed costs that airlines may incur include the periods over which aircraft are leased, salaries for permanent employees, and fees for using airports. Such expenses must be incurred whether many passengers are arriving or flying, fewer passengers are arriving or there are no passengers at all, as in the case of a flight that has not been booked.
Unsurprisingly, many firms prioritize fixed costs in internal decisions about where to direct funds, especially in aviation-related companies. This is because fixed costs refer to contractual obligations that must be fulfilled to continue running the business and meet legal requirements, according to Gabor et al. 2022). An airline may have a limited amount of available funds for investment; thus, it has to spend the majority of the funds on the lease of aircraft and employees’ wages before it can think of spending the rest of the money on purchasing fuel and other services that are offered mid-air. This priority focus is essential, especially given that the current electronic media industry is characterized by high fixed costs and significant capital investment.
The main variance between fixed and variable costs should be a significant consideration, especially during economic spacing or instability. According to the eBook “Managerial Accounting: According to “Tools for Business Decision-Making,” knowledge of these costs allows managers to make value-based decisions regarding pricing, budgeting, and financial prognosis (Gabor et al. 2022). Furthermore, Bitzan & Peoples (2016) strongly support this cost differentiation in the aviation industry, arguing that geopolitical cost management strategies significantly influence organizational profit and competitive strategy.
References
Bitzan, J., & Peoples, J. (2016). A comparative analysis of cost change for low-cost, full-service, and other carriers in the US airline industry. Research in Transportation Economics, 56, 25-41. https://doi.org/10.1016/j.retrec.2016.07.003
Gabor, M. R., Kardos, M., & Oltean, F. D. (2022). Yield Management—A Sustainable Tool for Airline E-Commerce: Dynamic Comparative Analysis of E-Ticket Prices for Romanian Full-Service Airline vs. Low-Cost Carriers. Sustainability, 14(22), 15150. https://doi.org/10.3390/su142215150
Krystal Johns posted Nov 7, 2024 1:37 PM
A cost in the aviation industry is generally categorized as either fixed or variable, depending on whether it changes according to levels of activity, such as flight operations. A fixed cost remains unchanged in total as the activity level (or cost driver) varies (Hilton & Platt, 2022). Fixed costs are those that remain constant regardless of the number of flights or passengers; they include expenses like aircraft acquisition, depreciation, hangar rental, insurance, and salaried employees (e.g., management or administrative staff). These costs are incurred regardless of the number of flights and provide the basic operational infrastructure required for an airline’s functioning. In contrast, variable costs fluctuate with operational activity and include items such as fuel, airport fees, maintenance related to usage, crew expenses, and in-flight catering. Among other factors, fuel costs change with flight frequency and distance, while catering costs depend on the number of passengers and the type of meals.
A major reason why airlines prioritize fixed costs when allocating funds is because they form the backbone of their operational efficiency and readiness. The difference between fixed and variable costs is that fixed costs do not change with activity volumes, while variable costs are closely linked to activity volumes (Accounting Tools, 2024). Thus, fixed costs are incurred over a period of time, while variable costs are incurred as units are sold (Accounting Tools, 2024). In order to keep planes airworthy and to provide essential services, fixed costs must be met. In daily operations, variable costs still play a crucial role, as they directly impact service quality and operational efficiency. Although firms may balance both cost types, they usually focus on optimizing variable costs (such as fuel efficiency measures and dynamic staffing) to improve profitability. It is essential to pay attention to both cost types, but fixed costs are prioritized in order to maintain baseline operational standards.
References
Hilton, R.W. & Platt, D. (2022). Managerial accounting: Creating value in a dynamic business
environment. (12th ed.). New York, NY: McGraw-Hill Education.
Accounting Tools. (2024, October 4). The difference between fixed and variable costs.
https://www. accountingtools.com/articles/the-difference-between-fixed-and-variable-
costs.html
Britteny Petersen posted Nov 6, 2024 6:54 PM
In the firm where I work, distinguishing between fixed and variable costs is essential for effective financial management and decision-making. Fixed costs are those that remain constant regardless of production levels, while variable costs fluctuate based on activity levels. For example, fixed costs include rent for office space and salaries for permanent employees. These costs do not change in the short term, even if the volume of operations increases. Variable costs, on the other hand, include materials, utility expenses tied to production volume, and direct labor costs that vary with production demand.
For instance, our catering business sees food expenses as a variable cost because the cost fluctuates based on the volume of events or orders. If we cater more events, food expenses rise accordingly. In contrast, the monthly lease on our kitchen space is a fixed cost, remaining constant regardless of the number of events catered.
In terms of prioritizing fund allocation, fixed costs generally receive priority in financial planning to ensure the business can continue operating even with fluctuating revenues. This is because failing to cover fixed expenses could disrupt essential services and operations. Variable costs, while also essential, are often adjusted according to available funds and demand levels. For example, in slower months, we may reduce inventory to align variable expenses with lower activity. Understanding these cost behaviors allows our management to set budgets, prepare for shifts in demand, and ensure financial sustainability across different business conditions.
References:
Sunghun Chung, Animesh Animesh, Kunsoo Han, Alain Pinsonneault (2020) Financial Returns to Firms’ Communication Actions on Firm-Initiated Social Media: Evidence from Facebook Business Pages. Information Systems Research 31(1):258-285. https://doi.org/10.1287/isre.2019.0884
Banker, R. D., Byzalov, D., Fang, S., & Liang, Y. (2018). Cost management research. Journal of Management Accounting Research, 30(3), 187-209.
Tatianna Khadoo posted Oct 16, 2024 11:44 AM
In any business, including those in the aviation sector, understanding the difference between fixed and variable costs is essential for effective financial management and strategic decision-making.
Differentiating Fixed and Variable Costs
Fixed Costs are expenses that remain constant regardless of the level of goods or services produced. They do not fluctuate with operational output. In the aviation industry, examples include:
Aircraft leasing or depreciation: Payments for leasing aircraft or the depreciation of owned aircraft are incurred regardless of flight operations.
Salaries of permanent staff: Salaries for pilots, administrative personnel, and ground crew typically remain fixed, not varying with flight frequency or passenger numbers.
Variable Costs, in contrast, change directly with the volume of production or services provided. In the aviation field, examples include:
Fuel costs: These expenses vary based on the number of flights and the distance traveled; more flights lead to higher fuel costs.
Maintenance and repair costs: These costs can increase with aircraft usage; more flights may result in greater wear and tear, leading to higher maintenance expenses.
Internal Decision-Making on Cost Prioritization
When it comes to prioritizing cost allocation, fixed costs typically take precedence in the short term. These costs represent essential expenditures that must be covered to sustain operations. For example, an airline must fulfill its lease payments for aircraft to continue functioning, irrespective of passenger volume.
While variable costs are also significant, they offer more flexibility in the short run. Airlines can adjust their routes, reduce flight frequency, or implement cost-saving measures during periods of low demand to better manage these variable expenses.
Framework for Decision-Making
In internal decisions regarding fund allocation, firms often prioritize covering fixed costs first to ensure operational stability. Once these costs are addressed, any remaining funds can be allocated to variable costs, maintaining flexibility to adapt to market demands.
For further insights into cost management, a valuable academic reference is “Cost Accounting: A Managerial Emphasis” by Horngren et al. (2013), which discusses the implications of fixed and variable costs in managerial decision-making.
Conclusion
In summary, recognizing the distinction between fixed and variable costs is crucial for firms, particularly in the aviation industry, where balancing operational capability and cost management is vital. By prioritizing fixed costs in decision-making, companies can ensure operational viability while strategically managing variable costs in response to demand fluctuations.
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