Classification of costs
1. Classification of costs according to traceability to product or service
1.1. Prime costs
Prime costs are the total direct costs necessary to produce a product or provide service. Therefore, prime costs involve direct material costs, direct labor costs and direct expenses. There is only negligible difference between prime and direct cost → all the direct costs form only one prime cost.
Although prime costs are usually associated with direct costs incurred to make a product, it may be related to other cost objects as well – for example a customer, activity or geographical segment. In this case, prime cost may include direct costs related with this cost object.
1.1.1. Direct costs
Direct costs are costs directly
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Production overheads
Production overheads are indirect costs that are incurred during manufacturing of goods or providing service. They include indirect materials, indirect wages and indirect expenses.
o Indirect material costs – e.g. negligible material, where it is difficult to estimate the consumption such as oil used to grease all machines in the factory, cleaning supplies or safety equipment in the production hall o Indirect labor costs –wages and salaries of staff not involved in the production process. For example wages of employees in purchasing department or security guards overseeing the production premises. Among indirect labor costs belong also: o bonuses and benefits paid o idle time of direct workers (e.g. during breakdowns or strikes) o wages of direct workers for time not working directly in production o various premiums (for shifts, overtimes etc.), unless they result from the specific request of a customer to finish his order quickly (odrážky = http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Labour%20costs.aspx?mode=none) o Indirect expenses – other expenses used in production, which cannot be clearly identified with a specific product or service. For example rent, depreciation or insurance of production premises, power for operating more production lines (where difficult to clearly relate the costs with a single
Firstly, the service supply chain requires low capital investment in equipment and machinery. In comparison, both the manufacturing and the service industries need labor inputs to complete the production processes that are necessary for satisfaction of end consumer utilities (Maxwell 2013). In addition, the businesses in both sectors require various types of inputs from their suppliers. Moreover, capital investments in material are required in both businesses to enable employee render their services. However, most of the labor costs in manufacturing firms are involved in transporting, procuring, and physical material manipulation. On the other hand, labor costs in the service industry are a...
Variable costs: “Variable costs are costs that vary with the volume of activity”2 and they are: direct labor, Materials, Material spoilage & direct department expenses.
Method of variable costing is a method where costing can be discovered including the variable manufacturing costs. Fixed factory visual projection is delighted as a period cost-it is abstracted along with the selling and administrative expenses in the period deserved. That is,
This is not necessary in process costing environment because in this environment all the unit or products produced are identical or can be regarded as similar to other. So there is no need to distinguish between direct and indirect cost (Atrill and McLaney, 2009).
As such, there is material cost regulator, manufacturing control, labor cost regulator, excellence control and so on. Conversely, control over the price is implemented through the methods of financial control and typical costing (Meigs, 1998). The control methods aid the management in understanding the operating competence of a firm. Cost accounting also determines the selling price. The intention of all business firms is minimizing costs and maximizing profits. The costs incurred in producing goods and services may be reduced through incorporating alternate but cheaper resources of
Total cost is all of the expenses incurred in the production of a product, to include fixed and variable costs. Fixed costs, are expenses that are constant and do not change from month to month regardless of the amount of products sold. For instance, the rent of the factory is considered a fixed cost, for the reason that, the rent must be paid whether products are produced and sold or not. Variable costs,
First and foremost, operating expense is one of the financial factors that affect the service industry. Operating expenses are expenses associated with the maintenance and administration of a business on a day-to-day basis. Operating expenses primarily consist of the money you must put out to stay in business. It includes your office space, utilities, transportation and supplies. Overhead operating expenses often is undervalued because so many costs are indirect and difficult to predict. The cost of gas, for example, changes regularly and
B. Overview of Process Costing. Manufacturing costs are accumulated in processing departments in a process costing system. A processing department is any location in the organization where work is performed on a product and where materials, labor, and overhead costs are added to the product. Processing departments should also have two other features. First, the activity performed in the processing department should be essentially the same for all units that pass through the department.
Cost can be divided into fixed and variable and by considering into fact that fixed and variable cost can be unarguably split into two, even though they behave differently based on the level of sales of volumes. Since, cost is used in every field to determine the price of an item and the unit sold. Two of the main components of cost are fixed and variable cost and is used to differentiate between the costs that have no direct correlation to business and those that do.
The second way is to achieve low direct and indirect operating costs is gained by offering high volumes of standard products and offering basic no-frills products. Production costs are kept low by using less parts and using standard components. Limiting the number of models produced to ensure larger producti...
Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.
Fixed costs, which are not usually associated with production- these are costs that are at a set price and will not change if income is high or low e.g. Rent and insurance.
Without direct labor, it is impossible for the work to be done. The direct labor budget is used to calculate the number of labor hours that will be needed to produce the units itemized in the production budget. The direct labor budget is useful for anticipating the number of employees who will be needed to staff the manufacturing area throughout the budget period. This allows management to anticipate hiring needs, as well as when to schedule overtime, and when layoffs are likely. (www.accountingtools.com)
Of greater importance, a job-order costing system needs to accumulate three types of information, which include direct materials, direct labor, and overhead. These factors are essentially highly important because of the significant variations in the products produced. Hence, each product or batch has a job identification number and costs are accumulated by a job number.
Additionally, there are semi –variable (or mixed) costs. A “semi-variable cost” is a “cost that has both fixed and variable components. This cost is fixed for a set amount of produced products or sold services and becomes variable after this amount of production/sales is exceeded. If no production occurs, the fixed component still occurs”. (Definition http://www.investopedia.com/terms/s/semivariablecost.asp).