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Essay / Research Paper Abstract
This 3-page paper asks when it would be likely to include fixed costs in calculating the cost of goods produced, and when it wouldn't be a good idea. Bibliography lists 1 source.
Page Count:
3 pages (~225 words per page)
File: D0_MTfixecost.rtf
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Unformatted sample text from the term paper:
product could be helpful or useful. Then there are times during which the opposite is true - including fixed costs in cost of goods manufactured would provide a somewhat distorted
view of what goes into a products manufacture. To answer the question as to the helpfulness of fixed cost inclusion (or non-inclusion),
it would first be a good idea to define what, exactly, a fixed cost is. In its most basic sense, a fixed cost is one that doesnt vary, depending on
production, sales levels or other factors (Investorwords.com, 2008). Some examples of fixed costs are rent, property tax, insurance, interest expenses or salaries (Investorwords.com, 2008). Fixed costs, or indirect costs, as
its sometimes called, are not related directly to the cost of producing a product or performing a service. They are necessarily, however, to the successful functioning of a business.
Now lets try to answer the question as to why inclusion of a fixed cost in calculating the cost of a product not
be useful. Some types of accounting methods, such as the allocation cost method, relies on direct costs when it comes to manufacturing a product or providing a service. Through the
allocation method, it can be determined whether too many resources are allocated to the production of a particular product - and those direct costs would include materials and energy used
to produce the product. Salaries, sometimes, are also used as a direct cost calculation, if the job at hand is directly related to production costs. If one is using the
allocation method, then all thats needed are the direct costs. However, if one throws indirect costs in there, it muddies the water. Certainly rent and insurance expense can be considered
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