Wednesday, October 24, 2012

Absorption Costing

Hurry Up Royal Jordanian!

I recently realized that when we travel, what we go through could actually explain the difference between fixed cost and variable cost;
  • Fixed cost would be the plane ticket, which is the same for the whole trip no matter how many days we spend abroad
  • Variable cost could be our hotel expenses, which would vary according to how many days we stay there
If one is calculate the cost of the trip per day, one method would be to absorb the fixed cost into the total cost; i.e. you add both fixed cost and total variable cost and then divide the result by the number of days for the journey and voila you will get one number that represents cost per day. This implies that if you are already visiting a distant destination, it would be a good idea to explore a couple of nearby destinations as you have already incurred the fixed cost.

However, the thing that I realized was that cost does not have to always be represented by money, sometimes it costs us 'time' to do something. For instance, visiting the gas station is a fixed cost, while the time spent for the tank to be filled is the variable cost; which theoretically means I will save more time if I get a full tank in one visit rather than pay two visits with filling half tank each.

I actually wrote this post while waiting in the airport, I am not flying RJ this time though:) 
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