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Classification Of Costs Essay

777 words - 4 pages

_Definition of a cost: physical quantity measurement multiplied by a price measurement.
Meaning of ‘activity’: generally, any physical operation that takes place in an organisation.
Meaning of 'output': Product or Service provided by the organisation.

_Variable costs and fixed costs:
- A variable cost is one, which varies directly with changes in the level of activity, over a defined period of time.
- A fixed cost is one, which is not affected by changes in the level of activity, over a defined period of time.
- Semi-variable = fixed + variable
- Step cost = fixed cost increases by steps. It is fixed over a specified level of activity, but will increase by a further level as the ...view middle of the document...

Indirect costs are also called overhead costs. (Electricity, administration salaries or supervisor, oil).
Some direct costs can be fixed. Variable costs are controllable and fixed costs are not.

_Product costs and period costs:
- Product costs are those costs associated with goods or services purchased, or produced, for sale to customers.
- Period costs are those costs, which are treated as expenses in the period in which they are incurred.

_Costs for planning:
Cost impact of a change in levels of production over a period of time? Fixed and variable.
Cost effect planning to expand operations by a new outlet in a particular location? Direct and indirect.
Cost impact of remaining open for longer hours to improve on existing client services? Fixed and variable.

_Costs for decision-making:
Should the company produce components in this country or produce them overseas? Fixed and variable.
Should the company continue to provide a service when demand is falling? Fixed and variable.

_Costs for control:
How closely do the costs of each product match the targets set? Direct and indirect.
How closely do the costs of a service department match the budget set for the department? Direct and indirect.
Is the value of the inventory (stock) of unsold goods stated correctly? Product and period.

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