In the aspect of cost accounting for business organization, all of the significant factors and issues involved in the activity and cycle of the business operation are narrowed and classified into groups based on their nature and impact on financial aspect of the group. In particular to this cost classifications is the fixed group which is defined in this concern as the expenses incurred by the business which do not vary in relation to the changes in the business activities such as production and sales.
Further, fixed costs are also classified differently from the cost of goods sold yet incurred in the operation as resources consumed during production. An example of fixed cost is the electricity resource needed to run the plant or factory over its fixed schedule of its operation including air conditioning system and the transportation machineries.
However, the term fixed in the name of fixed cost is relative based on its nature wherein the amount included in this classification varies from period to period. This is mainly because of the changes in the nature of the expenses included in this classification such as the expansion in population of the worker, the lengthening of production schedule and others. Thus, often, the collective amount included in the fixed cost classification increase or decreases from period to period.
In most cases though, the classification of fixed cost in some business organization becomes relative based on the nature and behavior of the expense. In these cases, the expenses viewed become partly fixed and partly variable of which they are now called mixed cost due to their characteristics. Consider the example given before, the electricity expense used for the in the factory for lighting and ventilating the facility is considered fixed cost incur by the business.
Whether there is manufacturing activity inside the plant or not, the cost of the said expense remains the same making it fixed. Other than this, the electricity expense incurred to operate the machineries in the production line becomes only variable wherein it is incurred only during operation. In addition, increasing the production potential and time would likewise increase the expense consumption for the machineries thus, making the variability of this cost dependent on the production usage and activity.
However, considering the total electricity cost for the said business operation would mean the combination of the said fixed and variable cost thus, resulting to the mixed cost of electricity expense. In general, in the analysis and perception of the cost accounting, the mixed cost is considered in the financial management as the relative combination of fixed and variable cost incurred by the business organization.
Doyle, David (2002). Cost Control: A Strategic Guide. CIMA Publishing. 2nd Revised Edition. ISBN-10: 1859715176.
Innes, John (2005). The Handbook of Management Accounting. CIMA Publishing. 3rd Edition. ISBN-10: 0750665181.