Understanding Fixed and Variable Costs in Budgeting

Fixed Costs

Costs that do not change with production volume.

Variable Costs

Costs that vary directly with production volume.

Contribution Margin

Sales revenue minus variable costs.

Break-even Point

Sales level where total revenue equals total costs.

Cost Object

Item or activity for which costs are measured.

Cost Driver

Factor that causes a change in cost.

Net Income

Total revenue minus total expenses.

Gross Margin

Sales revenue minus cost of goods sold.

Fringe Benefits

Additional compensation provided to employees.

Selling Price

Amount charged to customers for a product.

Cost per Unit

Total cost divided by number of units produced.

Fixed Cost per Unit

Fixed costs divided by production volume.

Sales Revenue

Income from sales of goods or services.

Sales Commissions

Payments to salespeople based on sales performance.

Total Fixed Costs

Sum of all fixed costs incurred by a company.

Variable Cost per Unit

Variable costs divided by number of units produced.

Production Volume

Total number of units produced in a period.

Indirect Cost

Cost not directly tied to a specific product.

Direct Labor Hours

Hours worked directly on production of goods.

Machine Hours

Time machines are used in production processes.

Allocation Base

Basis used to allocate indirect costs to cost objects.

Cost Allocation

Process of assigning indirect costs to cost objects.

Cost Driver

Factor influencing cost allocation to cost objects.

Relevant Costs

Costs that differ among alternatives in decision-making.

Sunk Cost

Past costs that cannot be recovered.

Master Budget

Comprehensive budget covering all departments' budgets.

Participative Budgeting

Budgeting involving input from all management levels.

Operating Budget

Budget covering day-to-day operational expenses.

Capital Budgeting

Financial planning for long-term investments.

Strategic Budgeting

Long-term budgeting for business scope and products.

Indirect Costs

Costs not directly traceable to a cost object.

Unit-Level Costs

Costs incurred for each unit produced.

Facility-Level Costs

Costs associated with overall facility operations.

Special Order Costs

Costs incurred when accepting special orders.

Opportunity Cost

Cost of the next best alternative foregone.

Job Offer Analysis

Comparison of relevant costs between job offers.

Budgeting Techniques

Methods used for creating financial plans.

Budgetary Targets

Goals set for financial performance in budgeting.

Decision-Making Costs

Costs considered when making business decisions.

Financial Planning Activities

Processes for managing future financial resources.

Cost Information Availability

Access to data needed for cost allocation.

Cause-and-Effect Relationship

Link between a cost and its driver.

Static budget

Budget based on fixed estimates for a period.

Perpetual budgeting

Continuous budgeting process for ongoing operations.

Participative budget

Budget created with input from all levels.

Top-down budget

Budget set by upper management without lower input.

Causation Concept

Evaluates managers based on controllable revenues or costs.

Controllability Concept

Managers evaluated only on aspects they can control.

Cost center

Manager responsible for costs, not revenues.

Profit center

Manager responsible for both revenues and costs.

Flexible budget

Adjusts costs based on actual activity levels.

Static budget variance

Difference between static budget and actual results.

Volume variance

Difference between planned and actual volume.

Favorable variance

Occurs when actual costs are less than standard.

Sales budget

Forecast of expected sales by product line.

Planning budget

Initial budget based on expected activity levels.

Employee salaries and wages

Fixed cost element in budgeting for services.

Revenue estimation

Forecast of income based on sales volume.

Fixed costs

Costs that do not change with activity level.

Variable costs

Costs that vary with production volume.

Budgeting period

Time frame for which a budget is prepared.

Variance analysis

Process of comparing budgeted to actual performance.

Activity levels

Measure of output used for budgeting.

Budgeting phases

Short term, intermediate term, and long term planning.