Chapter 10

Costs are classified in 2 ways:

By element:

• Materials - Raw materials, packaging, component parts et.
• Labour    - Manufactoring labour, office salaries
• Expenses- wages, heat+light, rent, royalties etc.

These elements are divided into direct and indirect costs/factory overheads.

By nature:

• Fixed               -  salaries
• Variable           - electricity
• Semi-variable   - telephone

Fixed costs - a cost which remains the same over a range of output levels. Examples are salaries, rent and depreciation. Fixed costs will not remain the same at all levels of output as when the business reached full capacity and the output level increases, the business will need extra resources to make extra output. This increase of fixed costs are called Stepped fixed costs.

Variable costs -  cost which varies depending on the level of output. The more a business makes, the more they will need to spend on materials.

Semi- variable costs -  A cost where there is an elementof fixed cost and variable costs. An example of this is a telephone bill. You can be contracted to pay a set amount of money to use the phone and have to pay even if you dont use it often. If you go over the contracted use, then the added cost is the variable cost as it depends on how much you go over. 

Marginal costing - the marginal cost of a product is the same as the variable cost.

Contribution - Amount of money that is made after variable costs have been deducted from revenue.

Marginal costing statement: 

       Sales Revenue    x
Less variable costs   (x)
                              -----
= Contribution           x
Less fixed costs       (x)
                              -----  
       Profit                 x