Types of costs
Classification of costs:
• Materials – costs of raw materials, components and other goods used.
• Labor – cost of employees wages and salaries.
• Expenses – costs which cannot be included in materials and labor.
Variable costs – these costs varies directly with changes in the level of quantity, over a defined period of time.
Fixed costs – are not affected by the changes in the level of activity, over a defined period of time.
Semi variable costs – for example, office salaries where there is a core of long term secretarial staff plus employment of temporary staff when activity levels rise.
Direct and indirect costs
Costs of a business activity can also be classified as direct and indirect costs.
• Direct cost – can be identified directly with each unit of output.
• Prime cost – total of all direct costs
• Indirect cost or overheads – are costs other than those identified as direct costs. They cannot be identified directly with specific units.
Remote costs – are costs which cannot be associated closely with any particular revenue generating function within the business, but which are incurred on behalf of the whole organization.
Product and Period costs – are those costs which are treated as expenses in the period in which they are incurred.
Classification by Function
1. Premises costs
These are the costs that are related to the area in which a business runs its work.
• Rent – some businesses might not own the work area, therefore the company must pay the owner for the rent.
• Rates – these are forms of taxes to be paid to the local authority that contributes to the services provided by that authority.
• Heating and lighting-gas and electricity bills must be paid to the company supplying the service.
• Insurance – the buildings must be insured against physical damages like fire and explosions.
2. Administrative costs
These involve simple...
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