P1 – Explain how an organisation can cost a product and determine its price at any activity level. A) Cost behaviour –
Fixed costs: Fixed costs are costs that do not change with output. For example; Salaries, rent and rates.
* Variable costs: Variable costs are costs that do change with output. For example; Materials and labour. Sales
Semi-variable costs: There is an element of both fixed and variable costs in this cost. For example; Electricity and water – Fixed: Standing charges. Variable: How much electricity/water you use.
* Steped costs: Steped costs stay the same for a certain amount of time and then they increase and then visa versa. For example – Quality control; Costs increase when the quality increases, and then when it stays the same, so do the costs.
B) Relating cost behaviour to The Khan’s Limited Company –
* Rent – Over the last three years the rent has increased by £50 every year. This could be due to expansion on the property, or increase in rent. This is a small amount of money that has been added on so this is not a problem for the company even though rent should usually be a fixed cost and doesn’t generally change. * Plant depreciation – Plant depreciation shows how much a company increases over time. Over the last three years however, it has stayed the same. This could be because of many reasons, for example; the company didn’t expand over the three years, or because of the economical situation there isn’t an increase in the value of the plant depreciation.
* Materials – The material costs over the last three years has changed. In the first year it was £2100 and in the second it went down to £2077 and then in the third year it went back up to £2106. Even though this only a small change, it affects the financial accounts. This change could be because of a high demand for the products in the first year and the last, and a low demand for their products in the second year. * Marketing costs – The marketing costs over the three years has increased; this is because the demand for the products could have decreased so therefore the company had to ‘up their game’ within the marketing department. * Direct labour – Direct labour is the direct work used to make the products so this can change whenever the company has a good year, or a bad year. Over the three years the cost of labour has increased from 1,383 in the first year to £1600 in the last. This could be because they have had to have staff working overtime, which is double pay, to finish products in time for suppliers if they had a big order. * Rates – Over the three years the rates of the company increased from £60, to £63, to £65,000. * Supervisor – The supervisors wages have increased slightly over the three years from 126 to 132 to 135,000. This could be because the increase in the amount of workers that have been working over the three years which I have explain above in direct labour. * Stores department – The figures for the stores department has increased over the three years; 174 to 198 to 201. This shows that the company is spending a lot more as the years go on, but looking at the figures they are selling more because of these decisions. * Administration Costs –The administration costs of the company decreased from 1,365 to 1,359. This is not a huge amount of money, but it shows that in 2010 the company had either a few new clients or sold a lot to their current clients. It then increased to 1,387 in 2011.
Semi – variable costs:
* Energy – Energy is a semi – variable cost as you have a base charge for a month of electricity, and if you go over this base cost you have to pay the extra. The figures rose from 1,315 to 1,383 to 1,433.
* Quality control – Quality control is a stepped cost which means it stays the same for awhile and then goes up and then stays the same...
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