Chapter 23
Cost Classification
Types of Costs
Fixed Cost
➡must be incurred & remains the same amount regardless of level of activity
➡do not change with the level of output
Eg straight line depreciation
Rent
Rates
Interest on fixed borrowings
Supervisors salary
Variable Costs
➡changes with the level of activity → cost increases in total as level of
activity increase → more you produce - more in total it will cost
➡ change with level of output
Eg direct materials → ingredients
direct labour → workers
direct expenses → patent
Step-Fixed Costs
➡ fixed within a certain range of activity - change outside that range
(in long term {more than 1 financial year} all fixed costs - variable)
Eg rent may increase each year
Interest rates - rise/fall
Step-Variable Costs
➡ can also be incurred in steps
Eg economies of scale - discounts received
Give a cost advantage to bus. when production becomes more
efficient
Cost of a unit - spread over greater number of units
Economies of scale
⤷proportional saving in costs from an increased level of production
Firm benefits from buying items - raw materials - in bulk
ie → larger amount of items purchased larger the discount
Controllable Costs
➡ can be controlled by the manager of a cost centre
➡ can decide amount of cost & whether it should be incurred or not
➡ can be held responsible for variances that may occur
➡ most variable costs - controllable
