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Cost note no.1 (Ch.2 & Ch.17).pdf - 0 Chapter 2 An...

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1Chapter 2An Introduction to Cost Terms and PurposesCost Object: anything of interest for which it is required toknow the cost, such as product, service, department, Project.Classification of Costs:Costs can be classified according to different points of view asfollow:1FunctionsManufacturingMarketingadministrative2Produced Unitdirectindirect3Volume of productionvariablefixedmixed(total)Direct and Indirect Costs:Direct costsIndirect costsDirect costs can be easilytracedto the cost object.Ex:Direct material in furnitureproduction, would be (woodand metal).The cost of worker whodirectly produce the costobject is called (direct laborcost) such as wages tocarpenter.Indirect costs cannot be tracedto a cost object. Instead ofbeing traced, these costs areallocatedto a cost object in arational and systematic manner.Ex:Indirect materialIndirect labor cost: salaries &wages of supervisors ormanagers.ElectricityRentEtc.………………
2Variable and fixed Costs: (Cost Behavior)Variable costFixed costVariable Costs: changes intotal in proportion to changesinthevolumeofoutput(production).ProductionVCProductionVCSuch as : Direct material costDirect laborFixed Costs: remain unchangedin total regardless of changes involume of output (production).It is fixed with any volume ofproduction up till full capacity.Such as : Rent[Rent of factory remains as it iswhatever the production unitsincreased or decreased].Cost Behavior SummarizedTotal DollarsCost per UnitVariableCostsChange in proportionwith outputMore output = More costUnchanged in relation to outputFixedCostsUnchanged in relation tooutputChange inversely with outputMore output = lower cost per unitNote that:Variable cost is variable in total but is fixed per unit.Fixed cost is fixed in total but variable per unit.Example:Units of production100020003000variable cost100002000030000Vc/ u101010Example:Units of production100020003000Fixed cost100001000010000Fc/ u1053.3v.cF.C
3Other Cost Concepts:Cost driver:A cost driver is a variable, such as the level of activity or volumeof production up, that causally affects a cost over a given timespan, that is, there is a causeandeffect relationship between achange in the level of activity or volume and change in the level oftotal costs.Relevant range:Relevant range is the band of normal activitylevel or volume of production up in which thereis a specific relationship between the level ofactivity or volume and a given cost.For example, fixed costs are considered fixed only withinthe relevant range(up to full capacity).Multiple Classifications of CostsThe relationship between: Direct & indirect costsFixed & variable costsNote that:All direct cost is variable, but not all variable cost is direct.

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Term
Fall
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40, C D, T MFG

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