Separation of Fixed and Variable Costs.

This article discusses the problem involved in allocating the various costs of manufacturing between the fixed and variable categories and to suggest a workable solution to this perplexing problem. This allocation is most commonly undertaken in connection with break-even analysis. Determination of fixed and variable expenses provides the basis for any type of cost-volume-profit analysis so it seems desirable to attack this problem first as a preliminary to any further study of such analysis. The allocation of manufacturing costs between the fixed and variable categories is often confused because, it is difficult to establish accounts which contain only one class of expense, that is fixed or variable. And secondly, many variable expenses do not maintain a constant relationship to the rate of operations. It is generally recognized that fixed costs are not truly fixed for all rates of activity or volume of production. They are fixed only for a given range of capacity and within a definite set of conditions. Yet, because of their nature and relationship to operations, they are identifiable and can be accounted for with accuracy. Consequently, their variability is predetermined to a high degree and is predictable, thus providing satisfactory data for analytical purposes.