Question 1: Advantages and disadvantages of fixed cost and variable cost in managerial accounting

In cost accounting, product costs behave in two ways. According to Crosson and Needles, the cost of a product can either increase or remain static (438). A variable cost as Mowen, Hansen and Heitger explain is the change of cost of a service or a product and how its effects on the expenditure of a company (657). Both have advantages and disadvantages.

Advantages

Fixed cost establishes a price point over a period of time. One of the advantages of fixed pricing is that it attracts repeat customers. Crosson and Needles indicate that fixed cost attracts several new customers as well as repeat clients because it offers assurance (435). Prospective clients are able to determine beforehand what they are going to pay for a service or product. This gives them guarantee.

Horngren, Datar and Rajan indicate that fixed costs create consistency (345). Individuals and clients gets accustomed to an established price. This consistency lowers the risk of fluctuations which offends and drives clients away. Moreover, fixed cost enables sales forecasting. Horngren et al. further indicate that with such stability, profit estimates as well as sales forecast can be made easily (346).

Horngren et al. point out that variables are important in developing an understanding of how net profits are affected by fixed costs (364). Therefore, in an income statement, variables are critical in determining total fixed costs. It is imperative to highlight that a variable costing system is used to control flexible budget costs.
In management accounting, a variable costing system provides cost volume profit (CVP) analysis information necessary for the preparation of income statements.  This is an advantage over an absorption costing system.  The latter cannot be used to obtain direct data.

Moreover, expenses a company will incur may be on an as-needed basis.  The net loss or net income will be determined by the fixed cost in the income statement. A fixed cost option lowers a variable cost.

Disadvantages

On the other hand, fixed and variable costs have numerous disadvantages. One such disadvantage as Hansen and Mowen note is lack of flexibility. It does not allow adjustments (460). The effect is that the cost basis for a product or a service becomes higher.

Besides, fixed cost does not factor in additional work or changes in time or cost. As such, a customer only pays for a product or service based on an established cost. As a result, a client may be undercharged for overtime service.

Additionally, under variable costing, financial statements prepared do not follow accepted accounting principles. It also does not follow a number of tax laws. Both variable and fixed costs ignore the cost of manufacturing items. This revenue cannot be matched with the production costs.
Question # 2: Why high – low method is not accurate

The need to split variable and mixed costs has seen the use of several techniques including high-low method.  One disadvantage of the high-low method is that it is unreliable. It does not give accurate information on actual data as it relies on total cost figures of two extreme activities. While it is possible to use the method to obtain actual billing data, in a tiered pricing system, it is impossible to obtain accurate data.

Question #3: The difference in net operating cost when using absorption and variable method

Crosson and Needles observer that there is a difference in net income operating figures when variable and absorption costs are used (350). This is because under costing methods, fixed manufacturing overhead costs are used differently. It is imperative to note that in comparison, variable costing system is always lower than the net operating income when an inventory increases in an absorption costing system. Besides, under variable costing system, when an inventory decreases, the net operating system becomes higher than absorption costing system. Another difference is the release and deferral of the fixed manufacturing overhead cost. An increase in inventory causes it to be deferred while a decrease causes it to be released.