Classification Of Costs Flashcards
What is a variable cost
A variable cost is one which varies directly with changes in the level of activity, over a defined period of time.
What is a fixed cost
A fixed cost is one which is not affected by changes in the level of activity, over a defined period of time.
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 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.
Step cost and example
A fixed cost that increases in steps.
•e.g. rent storage space until full capacity reached, then expand by renting second storage space
Examples of semi-variable costs are:
Office salaries where there is a core of long-term secretarial staff plus employment of temporary staff when activity levels rise.
Indirect costs are also called…
overhead costs.
Direct costs
Direct costs: directly traceable to an identifiable unit, such as a product or service or department of the business
Direct costs are usually variable costs
Indirect costs
Indirect costs are expenses that cannot be directly tied to a specific product, service, or cost object. These costs are incurred for the overall operation of the business and are shared among various products or services.
(spread over a number of identifiable units of the business, such as products or services or departments, for which costs are to be determined.)
Product costs
Product costs are those costs associated with goods or services purchased, or produced, for sale to customers.
Product costs include direct materials, direct labor, and manufacturing overhead. These costs are incurred during the manufacturing process and contribute to the creation of a product.
Period costs
Period costs are expenses incurred during a specific time period and are not directly tied to the production of goods.
They are treated as expenses
Period costs include selling and administrative expenses. Selling expenses involve costs associated with marketing and selling products, such as advertising and sales commissions.
Cost centre
Definition: Unit responsible for costs under a manager’s control.
Example: Production departments, service units.
PROFIT CENTRE
Definition: Unit accountable for both revenues and costs.
Example: Division, product line, regional office.
Investment centre
Definition: Unit responsible for capital investment decisions, revenues, and costs.
Example: Subsidiaries, business units.
