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UNDERSTANDING FIXED AND VARIABLE COSTS

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					  Chapter 4: Calculating ROI for Your Anti-Spam and Anti-Spyware Measures                  75
      Which is the correct figure? Arguably, either could be approximately correct.
      But you could also tweak the answer by taking time into account in other
      ways — for example, these:

           How about a longer time to check? You could run that sniffer for a week
           or more to see whether you get a statistically different result. (Maybe
           the general manager had only three days to get an answer.)
           Was the time of year relevant? During the holidays (for example), the
           cost could be greater or less, depending on how many employees take
           vacations, as well as whether business use of e-mail during the time of
           the measurement was representative of average use over the entire year.
           You may want data from a more “typical” time of year.



      As simple as ABC?
      With these examples, you see that Activity-Based Costing is little more than
      taking the total cost of a resource and calculating the proportions of the cost,
      function by function. This is, however, often easier said than done. It’s more
      typical to see an ABC exercise done over a large department that has a great
      number of complex costs associated with it — such as leasing, depreciation,
      reserves, and stock on hand (for starters). ABC can become complex in a
      hurry.




Understanding Fixed and Variable Costs
      In the cost-of-e-mail example in the preceding section, someone might erro-
      neously argue that reducing the volume of e-mail will have an impact on the
      cost of the data circuit. Estimating the cost of activities requires an additional
      dimension, the understanding of fixed costs and variable costs.

      Fixed costs are those costs that do not vary from one period (say, a month) to
      the next. Some examples of fixed costs are

           Data circuits: Telco circuits such as T-1s and DSL are usually billed at
           fixed costs regardless of usage.
           Depreciation: Generally, this is a fixed amount each month over a period
           of time, although from one year to the next the amount may vary. Still,
           most consider depreciation a fixed cost. It’s predictable.
           Equipment leases: You generally pay a fixed rate per month for leased
           computers and network equipment, whether you use them or not.

				
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posted:10/10/2011
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