Why should variable expenses be planned after fixed expenses when preparing a budget for net sales?

• A. Because variable expenses do not affect net sales.
• B. Because variable expenses are always higher than fixed expenses.
• C. Because fixed expenses must be paid regardless of sales volume, so they take priority in planning.
• D. Because fixed expenses can be adjusted more easily than variable expenses.

Answer: (C)

Verified step by step guidance

1. Understand the concept of fixed expenses: Fixed expenses are costs that remain constant regardless of the level of sales or production, such as rent, salaries, and insurance. These expenses must be paid regardless of the company's performance.
2. Understand the concept of variable expenses: Variable expenses are costs that fluctuate based on sales volume or production levels, such as raw materials, commissions, and shipping costs. These expenses are directly tied to the company's activity levels.
3. Recognize the priority in budgeting: Fixed expenses take priority in planning because they are mandatory and must be covered regardless of sales volume. This ensures the business can continue operating even during periods of low sales.
4. Plan variable expenses after fixed expenses: Once fixed expenses are accounted for, variable expenses can be planned based on projected sales volume. This allows for flexibility in adjusting these costs according to expected revenue.
5. Understand the relationship to net sales: Fixed expenses do not depend on net sales, while variable expenses are influenced by sales volume. Therefore, planning fixed expenses first ensures the business's essential obligations are met before addressing costs that vary with sales.