COMM-2016EL Study Guide - Midterm Guide: Fixed Cost, Toronto General Hospital
28 Oct 2017
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Cost Terms
A more detailed look at cost terms will help further our analysis of quantifying how
activities of an organization affect the levels of costs. Many activities affect costs, but for
some costs, volume of a product produced or service provided is the primary driver. Other
costs are more affected by activities not directly related to volume and often have multiple
cost drivers.
There are two types of costs that combine the characteristics of both fixed and variable
costs behaviour. These are called step costs and mixed costs.
Step- Fixed Costs- within the relevant range, step cost behave like fixed costs. The costs
usually remain fixed when the range is large and a broad range of activities.
Step- Variable Costs- Step costs can also be variable when the range is small. The costs are
variable because a small change in activity changes the costs. For example one waiter can
serve 80 customers in a four hour shift however if between 80-160 customers are expected
than another waiter has to be called in. Thus the number of waiters depends on the block
changes in the number of customers.
Mixed Costs- Contain both fixed and variable behaviours. The cost behaviour is similar to
that of the step fixed costs. Within the relevant range the costs remain fixed. The variable
costs are different than the step- variable costs as these variable costs are incurred in
addition to the fixed cost. Essentially mixed costs are the fixed cost plus the variable costs
incurred. For Example: Toronto General Hospital has an X-ray machine that has a fixed
component which is depreciation and salaries for technicians, however it also has a
variable component such as X-ray film, and supplies. Fixed costs are the costs just to have
machine ready for use, variable costs are based on actual consumption or use.
Committed Fixed Costs- Relates to the investment in facilities and the basic organizational
structure. Usually incurred for the long term and cannot be cut to zero without seriously
impairing the profitability of the company. Even if operations are cut back committed costs
will unchanged. For example: mortgage costs or property taxes.
Discretionary Fixed Costs- (also known as managed fixed costs) - fixed costs that do not
change with the level of production however these are costs that can potentially be added
or deducted during the budget process. For example advertising, research and
development. Discretionary costs are different than committed cost in the sense that these
cost are made for short term planning (annual decisions) and can be cut without impairing
the company profits in the long term.
Document Summary
A more detailed look at cost terms will help further our analysis of quantifying how activities of an organization affect the levels of costs. Many activities affect costs, but for some costs, volume of a product produced or service provided is the primary driver. Other costs are more affected by activities not directly related to volume and often have multiple cost drivers. There are two types of costs that combine the characteristics of both fixed and variable costs behaviour. These are called step costs and mixed costs. Step- fixed costs- within the relevant range, step cost behave like fixed costs. The costs usually remain fixed when the range is large and a broad range of activities. Step- variable costs- step costs can also be variable when the range is small. The costs are variable because a small change in activity changes the costs.
