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Classification of Costs

_Definition of a cost: physical quantity measurement multiplied by a price measurement.
Meaning of ???activity??™: generally, any physical operation that takes place in an organisation.
Meaning of output: Product or Service provided by the organisation.

_Variable costs and fixed costs:
– A variable cost is one, which varies directly with changes in the level of activity, over a defined period of time.
– A fixed cost is one, which is not affected by changes in the level of activity, over a defined period of time.
– Semi-variable = fixed + variable
– Step cost = fixed cost increases by steps. It is fixed over a specified level of activity, but will increase by a further level as the level of activity reaches a trigger amount.

_Examples of variable costs are:
– materials used to manufacture a unit of output or to provide a type of service.
– labour costs of manufacturing a unit of output or providing a type of service.
– commission paid to a salesperson.
– fuel used by a haulage company.

_Examples of fixed costs (or semi-fixed) are:
– Salary paid to a supervisor.
– Advertising in the trade journals.
– Business rates paid to the local authority.
– Depreciation of machinery calculated on the straight line basis.
Unit cost is decreasing as output increases, because the fixed cost is spread over more vases.

_Examples of semi-variable cost are:
– Office salaries where there is a core of long-term secretarial staff plus employment of temporary staff when activity levels rise.
– Maintenance charges where there is a fixed basic charge per year plus a variable element depending on the number of call-outs per year.
– Telephone bill
– Electricity
– Sales person, commission + salary

_Examples of Step-Costs:
– Paying that can work only in teams, and I have to hire a new whole team

_Direct costs and indirect costs:
– Direct costs: directly traceable to an identifiable unit, such as a product or service or department of the business (Materials, direct labour)
– Indirect costs: spread over a number of identifiable units of the business, such as products or services or departments, for which costs are to be determined. Indirect costs are also called overhead costs. (Electricity, administration salaries or supervisor, oil).
Some direct costs can be fixed. Variable costs are controllable and fixed costs are not.

_Product costs and period costs:
– Product costs are those costs associated with goods or services purchased, or produced, for sale to customers.
– Period costs are those costs, which are treated as expenses in the period in which they are incurred.

_Costs for planning:
Cost impact of a change in levels of production over a period of time Fixed and variable.
Cost effect planning to expand operations by a new outlet in a particular location Direct and indirect.
Cost impact of remaining open for longer hours to improve on existing client services Fixed and variable.

_Costs for decision-making:
Should the company produce components in this country or produce them overseas Fixed and variable.
Should the company continue to provide a service when demand is falling Fixed and variable.

_Costs for control:
How closely do the costs of each product match the targets set Direct and indirect.
How closely do the costs of a service department match the budget set for the department Direct and indirect.
Is the value of the inventory (stock) of unsold goods stated correctly Product and period.

_Cost selection and reporting:
– Cost centre is a unit of the organization in respect of which a manager is responsible for costs under his or her control.
– Profit centre is a unit of the organisation in respect of which a manager is responsible for revenue as well as costs.
– Investment centre is a unit of the organisation in respect of which a manager is responsible for capital investment decisions as well as revenue and costs.

_Variable/Fixed or Direct/Indirect:
Salespersons??™ weekly wage: Fixed and Indirect
Salespersons??™ commission as percentage of bicycle selling price: Variable and Direct
Presale service and check of each product sold: Variable and Direct
Office clerk??™s weekly wage: Fixed and Indirect
Shop manager??™s monthly salary: Fixed and Indirect
Free accessories given with each product sold: Variable and Direct
Shop cleaner??™s weekly wage: Fixed and Indirect
Weekly advertising in local newspaper: Fixed and Indirect
Fire insurance premium for shop: Fixed and Indirect
Theft insurance premium based on estimate in advance of the total value of products to be purchased and sold: Variable and Indirect
Cost of purchasing from suppliers: Variable and Direct
Cost of transporting products from supplier: Variable and Indirect
Usually Direct are also Variable and Indirect are also Fixed