Effects of Mixed Costs on Managerial Decision Making

Introduction 

Mixed costs are semi-variable costs that combine those that are affected by activity level (variable costs) and those that are independent of activity level (fixed) costs. Mixed costs affect decisions regarding planning and control processes. This paper discusses how semi-variable costs affect decisions concerning budgeting, keeping or dropping product lines, and evaluating the performance of business segments.

Budgeting 

Budgeting in a company depends on the information from both fixed and variable costs (Griffin & BarCharts, 2017). Costs of services, for instance, will determine the amount that will flow into the company from sales of products and services. Expenses in the company can be controlled by cutting down variable costs such as donations to charity and employee incentives (Epstein & Malina, 2016). A manager should identify the fixed costs of goods and services, such as rent and insurance costs which are unavoidable to develop a reasonable budget (Griffin & BarCharts, 2017).

Product Lines 

Managers decide to keep or drop product lines depending on the mixed costs in the company (Epstein & Malina, 2016).  Managers use relevant costs information to determine whether to keep or delete a product or service in the company (Griffin & BarCharts, 2017). Relevant costs will look at the difference between unit variable costs plus the difference in the directly attributable fixed costs to get a margin. Low margins that prove unprofitable to the company can make a manager delete the product line from the company’s chain.

Performance of Business Segments 

Managers are supposed to evaluate the performance of market segments within their companies. Evaluation of segment profitability, for example, involves a comparison of sales revenues of the division against its mixed costs (Griffin & BarCharts, 2017). Computation of business segment margin requires subtraction of both controllable and non-controllable direct expenses from the segment’s revenues to obtain values for analyzing the performance of the unit (Epstein & Malina, 2016). Mangers rate the performance of divisions concerning the profitability margin obtained by comparing costs and revenues.

Conclusion 

A manager’s decisions regarding the budgeting, acceptance, and deletion of product lines, and evaluation of market segments depends on the direct and variable expenses incurred in the company.

References

Epstein, M. J., & Malina, M. A. (2016).  Advances in Management Accounting  (Vol. First edition). Bingley, UK: Emerald Group Publishing Limited

Griffin, M. P., & BarCharts, I. (2017).  Cost Accounting . [Boca Raton, Florida]: QuickStudy Reference Guides.