Fixed and variable costs of auto manufacturing

Managers use these costs in a variety of ways. For instance, a management team must first calculate the manufacturing overhead costs of a company to perform a profitability analysis and determine the price they need to sell their products to make a profit. Companies' fixed overhead costs vary widely, depending on the nature of the business and how management defines fixed expenses.

Fixed and variable costs of auto manufacturing

Fixed and variable costs of auto manufacturing

Excerpt Introduction This assignment aims at comparing and contrasting the driver of costs in the automotive industry, both in the short and the long run.

Secondly it critically evaluates the benefits from economies of scale in the global automobile industry. This slack in well-established markets combined with hard competition from Asia as well as rising costs of production concludes in serious problems for the western giants Economist In the first part of this paper, the cost drivers are analysed and implications for the automobile industry are drawn.

Interestingly, while clearly being in an mature stage of the industry lifecycle, the biggest companies, excluding Toyota, are the most unprofitable in the automobile sector SEIDEL et al The second part of this assignment therefore evaluates the validity of the theory of economies of scale in the automobile sector.

Cost drivers In theory, costs are partly fixed and partly variable in the short run Appendix 1. Fixed costs in economic theory consist of capital, which is needed for production in terms of investments in machinery, brand building, premises and other fixed assets Begg and Ward In the short run, only variable costs can be influenced and fixed costs, in the short run sunk costs, are therefore not relevant for an economic decision.

Katz and Rosen In the automobile industry, besides labour, mainly raw material and distribution costs can be categorized as variable in the short run.

Labour costs, while being theoretically variable, develop more and more fixed characteristics as labour laws and union agreements prohibit or raise the price of layoffs in Europe. But also in America, without such strict laws, pension and healthcare as part of labour costs can be regarded as fixed cost drivers BusinessWeek On the other hand, distribution costs e.

Mainly in America, GM and Ford try to stabilise sales figures with these short run stimulators, though resulting in soaring distribution costs Globalinsight a. Also raw material costs factoring as a cost driver in the short run.

Due to rising oil prices as a result of psychological and physical scarcity, costs of all major raw materials for the automobile industry such as steel, aluminium, rubber and plastics followed that development. In the long run, economic theory suggests that all costs are variable, therefore all different types of costs become relevant for an economic decision Begg and Ward Therefore, in the long run[1], cost drivers mainly consist of investments in production facilities, in product development and in marketing.

Fixed and variable costs

Moreover, long term financing costs of a company such as dividends and debentures could be regarded as cost drivers in the long run. In the automobile industry, investment costs include automated production lines, but also high costs of product development and extensive marketing. Especially overcapacities in production lines are long run cost drivers.

Downsizing is not always possible as production equipment is highly specialised and not interchangeable between different suppliers. Also rising marketing costs due to increasing competition drives costs up.

Moreover product development gains importance as the product lifecycle shortens and competitive advantage can mostly be derived from innovative qualitative products SEIDEL et al Also location disadvantages could derive in long term costs as labour is significantly cheaper in Asia than it is in Europe and America.Thus budgeted fixed overhead costs of $, shown in Figure "Fixed Manufacturing Overhead Information for Jerry’s Ice Cream" will remain the same even though Jerry’s actually produced , units instead of the master budget expectation of , units.

If you own and operate your own auto detailing or mobile auto detailing business chances are you do not know what it costs to operate your business on a daily basis.

You are providing a service which is very labor intense; you actually need to know what your hourly operating cost is. Variable costs are costs that change in proportion to the good or service that a business produces. Variable costs are also the sum of marginal costs over all units produced.

They can also be considered normal costs. Fixed costs and variable costs make up the two components of total cost. Direct costs, however, are costs that can easily be associated with a particular cost object. Fixed and variable costs are important in management accounting and financial analysis.

Related Questions

Fixed costs do not change with increases/decreases in units of production volume, while variable costs are solely dependent on the volume of units of production.

The following table shows various variable and fixed costs incurred by a manufacturing. Owner-operator expenses: Fixed costs vs variable costs If you’re an owner-operator or a small trucking fleet manager or owner, it’s a must that you understand the costs of operating your business.

Typical fixed costs differ widely among industries, and capital-intensive businesses of more long-term fixed costs than other businesses.

Airlines, auto manufacturers, and drilling operations usually have high fixed costs.

How to Lower Fixed Cost to Achieve Financial Flexibility