Definition
As defined by the business dictionary, a cost is the amount paid for getting something. In business, it is known as the valuation of effort, material, resources, time & utilities used up, risks incurred and opportunity forgone in production and delivery of goods or services (Business dictionary).
Cost classification
It is the process of breaking down the big massive cost into different parts based on (1) nature, (2) traceability, (3) behavior and (4) production and non-production cost.
1- Nature
Classifying by nature means separating cost into material, labor and other expenses. For example, consider a manufacturer for a chocolate. The materials might include sugar, cacao, wrapping papers, wrapping machine and the factory. The labor
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Direct material, direct labor, direct expenses and variable overheads are some examples of the variable cost.
The below example shows the variable cost and the variable cost per unit in relation with the level of activity.
Units Variable cost Variable cost per unit
100 500 5
200 1000 5
400 2000 5
What we can realize from the above examples is that, the fixed cost in total is constant while the variable cost per unit is constant.
In addition to the fixed and variable cost, there are other cost behaviors the “semi-variable” and “step cost”.
Semi-variable cost
This is a mix between the fixed and the variable cost. It is affected by the level of activity. In other words, it is the cost which has a part that remain fixed at a certain level of production and another part which varies with the change in level of production but in the same proportion.
Semi-variable cost = Fixed cost + variable cost
Variable cost per unit = change in cost / change in level of production
For example, if the cost of production is 26000 $ for 2000 units and 30000$ for 2500 units, then the variable cost per unit = (30000-26000) /
Fixed expenses are those that will be there everyday the lodge is open regardless of the number of skiers. The Lodge is open 200 days per year and the cost of running the new lift is $500 per day for the entire 200 days giving us $100,000 in fixed costs. Variable costs are the expenses based on the number of customers. There is an additional $5 expense per skier per day associated with the new lift. If there are 300 skiers multiplied by $5 each multiplied by the 40 days that they are expected to be on the lift, we will have $60,000 in variable expenses.
Variable costs, for a manufacturing company, are those costs that increase or decrease as production increases or decreases. If production increases, then variable costs will increase; if production decreases, variable costs will decrease. For Claire’s Antiques, examples of their variable costs would be manufacturing labor, raw materials, and manufacturing overhead. Examples of manufacturing overhead would be the utilities that are used in the production facility, and the oils and lubricants used in the machinery. Fixed costs in a manufacturing company are those costs that remain constant regardless of the level of production. Examples of fixed costs for Claire’s Antiques are: sales and administrative costs, rent and/or mortgage on the production facility, and depreciation. Semi-variable, or mixed, costs are costs that have both fixed and variable costs. An example of a semi-variable cost could be if Claire’s leases their delivery trucks, and the lease includes a mileage fee. The monthly lease would be considered a fixed costs, but the mileage fee would be a variable cost. (Hofstrand, 2007). In most cases, fixed costs are usually higher than variable costs, and can absorb a great deal of profits. Because of this, some companies may consider converting their fixed costs to variable costs.
So when there is a decrease in the number of workers employed, there is a decrease in output, hence both the marginal cost curve and the average variable cost curve will decrease. The results are a decrease in total cost. It can be concluded that a short-run change in a factor of production, namely the variable factor labour, decreases the costs of the SABMiller more than the level of their output, and therefore aids in maximising profits.
e. In general, products that are expensive to produce tend to have higher selling prices than those that are cheaper to produce. By calculating $ 8 - ($4,000 / 1,500) = $ 5.33, it is clear that to keep the same price for all units, there will be a need to reduce the selection of the 15 types currently available to a reduced number which would include only those with an average variable cost less than $5.33.
1) Total Variable Costs are 60% of Total Costs; While the other 40% are from fixed costs.
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.
Cost-plus pricing, it the industry pricing standard, and is a method to determine a price of the product by finding the cost per unit and then including a mark-up
Overhead based on units sold includes only sales and marketing. Sales and marketing will be targeted mostly towards the products that are already on the market, and so units sold is the best way to associate the cost with each product. (Figure A)
The average cost maintains the full cost of the objective divided by the number of units of provided service while the marginal cost refer to the additional cost incurred as a result of providing one more service unit (Finkler et al., 2013). The fixed cost refrains from changing based on changes in volume of service units while variable cost, on the opposite end, varies in cost based on changes in volume of service units (Finkler et al.,
Treating overhead costs as "fixed" can cause an unfair and highly misleading distribution of overhead costs which are in fact variable.
The overall purpose of cost accounting is to advise top administration and the management team on the most suitable and cost effective methods and actions to employ based on cost, capability and efficiencies of a given product or service. It can be defined as the method where all the expenditures used during execution of business activities are gathered, categorized, examined and noted down (Horngren & Srikant, 2000). Once these numbers are gathered and recorded the information is used to determine a selling price and/or to identify possible investment opportunities. Although the principal aim or function of cost accounting is to help the business administration with their decision making and business planning process, the cost accounting data
Process costing is a way of breaking down cost that goes into each product manufactured. This allows for the correct pricing of the product as well as looking at possible inefficiencies in the production process. The following reasons explain the importance of correctly allocating cost to each product.
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,
For example: with the increase of the number of products produced, the cost of operating a machine also increase. Second we have batch level costs which is associated with batches; producing a multiple units of the same product that are processed together is called a batch. The third type is product level costs which arise from any activity in order to support the production of products. The fourth and the last type is facility level costs, this costs cannot be determined with a particular unit, product or batch; this costs are fixed with respect to batches, products and number of units produced. A single measure of volume is used for allocating costs to each service or product in traditional method for example: direct material cost, machine hours, direct labor cost and direct labor hours. A cost driver is an activity that generate costs, it can be generated by two types of costs the first is a particular machine 's running costs where the costs is driven by production volume as machine hours; the second is quality inspection costs where the cost is driven by the number of times the relevant activity occurs as the number of
Differential costs are the costs that can be avoided and are varied from one alternative to another. In other words, they are the costs which are borne by the company only if an alternative is chosen, whether these costs are variable or fixed (Kumar, n.d).