Cost behavior is an important tool for businesses to examine their success and actual profits. It can be used for many purposes, including strategic planning to determine effective price points that are above the break-even point. A qualified CPA in Reno can help a business use this principle to manage budgets more effectively.
What is Cost Behavior?
Cost behavior is often explained by CPAs in Reno as the study of how costs change in a business when there is a change in the activity level. Every company has a variety of costs, although there are four types that come up the most. Cost behavior analysis is used to predict costs over time and can help a business in many areas. Typically, businesses of all sizes hire a CPA to manage this aspect.
Variable and Fixed Costs
Variable costs are usually defined as those that change depending on the level of activity. A good example of a variable cost in a business is sales commissions paid to employees of the store. Because employees earn a percentage of the sales, the cost is variable based on the total sales in the store. Fixed costs, on the other hand, will not change with a difference in the level of activity. Examples of fixed costs in a business include rent and insurance premiums.
Step Costs and Mixed Costs
The step costs of a business are unique because they stay the same for a certain amount of activity. When the level of activity is surpassed the costs jump. These costs don’t apply to every business, but an example is payment to a service representative that has reached their maximum number of customer calls. At this point, a new employee must be added, and the cost of compensation jumps. Mixed costs, however, are a combination of variable and fixed costs. An example of a mixed cost is a telephone bill for the company. Generally, the charge is always the same unless the level of service is exceeded. At this point, an additional variable cost is added.
Why Cost Behavior is Important
A trained CPA in Reno can help a business fully use cost behavior for a number of purposes. Cost behavior is usually used for strategic planning in a company and is the only way to accurately predict cash flow over time. A CPA can also use this idea to determine the company’s break-even point for any cost, allowing management to create a proper selling price. Other uses in the company’s strategic planning include the determination of dividend payments and the preparation of budgets.
Every business has a variety of costs it incurs regularly. Understanding and planning for these costs is vital to ensure the company maintains profits and grows over time. All businesses should consult with a CPA to analyze the cost behavior of their company. A good analysis can lead to everything from the right selling price for goods to accurate dividend payments for stockholders.
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