Managerial Accounting Assignment: Fixed Costs and Operating Leverage

This managerial accounting assignment addresses the significance of controlling fixed costs within organizations and how operating leverage impacts a company's financial performance. The solution explains that fixed costs, unlike variable costs, remain constant regardless of production volume, making them a key area for managerial focus. The assignment also clarifies the concept of operating leverage, defining it as the proportion of fixed costs relative to total costs and its influence on a company's breakeven point and profit margins. It highlights how high operating leverage can magnify earnings with modest revenue increases and emphasizes the importance of efficient cost management for financial stability and profitability. The assignment draws on academic sources such as Drucker (2017), Fazzari & Petersen (1993), D’Acunto, Liu, Pflueger, & Weber (2017), and Wilkinson (2013) to support its arguments.

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“MANAGERIAL ACCOUNTING”
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1. WHY DOES MANAGER PUT SUCH A GREAT AMOUNT OF EMPHASIS
ON CONTROLLING FIXED COST IN THEIR ORGANIZATIONS?
Fixed cost is the cost per unit depending on the output and decreases as the output cost increases.
Fixed cost does not vary with production or the number of services has produced. Therefore, fixed
cost is considered as the direct cost. On the other hand, fixed cost includes the cost due to rent,
insurance or the costs incurred with the utilities for running the business, like salaries or expenses
due to promotion or advertising etc. Fixed cost can be changed with period of time (Fazzari &
Petersen, 1993). On the other hand variable cost by its name itself has been varied with the
number of service that is rendered. This variable cost is directly related with the business activity.
Whatever the business is did it is just changed with the business’s downturn or upturn. Thus the
manager always uses to check the fixed cost first to maintain a constant cost per unit for the
business purpose. It is also important that with a very small decrease in sales there can be a higher
value of fixed costs in case of lowers earnings. The company thus tries to maintain the higher level
of the fixed costs which is more sensitive with the change of cost in production or services
expenses, for experiencing the fluctuation in case of earnings. For these facts discussed, managers
keep in mind the importance in controlling the fixed costs (Drucker, 2017).
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2. WHAT IS MEANT BY THE STATEMENT, MY COMPANY HAS GOOD
OPERATING LEVERAGE? HOW DOES GOOD OPERATING LEVERAGE
MAGNIFY EARNINGS RESULTS WITH MODEST REVENUE INCREASE?
Operating Leverage is the measurement for company’s fixed costs which are the
percentage of total costs. Operating leverage is used to perform for measuring the
breakeven point for the business as well as the profit levels over sales. Therefore, the high
operating leverage is known as the large proportion for costs or expenses which are called
fixed costs. It also indicates the exact profit variance on behalf of the company. When the
firm earns the large amount of profit and at the same time attains the sufficient sales
volume in case of covering the substantial fixed costs. Thus the good operating leverage
indicates the lower amount of fixed cost as well as the large number of variable costs
(D’Acunto, Liu, Pflueger, & Weber, 2017).
The company having good or high operating leverage depends on the sales volume or the
revenue for profitability. This high value of sales covers the high value of fixed costs.
When revenue increases the company makes profits so it is most important to calculate the
operating leverage as the profit is directly related with the operating leverage. On the other
hand, with high value of operating leverages indicates high value of breakeven point. And
this breakeven point refers the level of revenue in which per unit profit covers the fixed
costs related with production. So, it is very obvious that the company should have high
operating leverage so that the high value of breakeven point will reach the target revenue
easily. If it exceeds the breakeven point, the revenue will increase and so profits will be
more (Wilkinson, 2013).
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WORKS CITED
D’Acunto, F., Liu, R., Pflueger, C., & Weber, M. (2017). Flexible prices and leverage (No.
w23066). National Bureau of Economic Research, 456-678.
Drucker, P. F. (2017). The Theory of the Business (Harvard Business Review Classics).
Massachusetts, United States: Harvard Business Press.
Fazzari, S. M., & Petersen, B. C. (1993). Working capital and fixed investment: new evidence on
financing constraints. . The RAND Journal of Economics.
Wilkinson, J. (2013, 07 24). Operating Leverage. Retrieved from https://strategiccfo.com:
https://strategiccfo.com/operating-leverage/
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