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Unformatted text preview: n or decision making it is necessary to analyze and
Costs can be classified as follow:
Costs may or may not vary with the level of activity. The level of activity usually refers
to volume of production or number or value of items sold.
There are four types of costs that are classified on the basis of behaviour. They are:
1. Fixed Costs: these are costs that will not change over a given range of activity
(volume) and within a given period of time. Examples of fixed costs include
insurance, depreciation and director’s salary. Since fixed cost relates to a time
span it is also referred to as period cost.
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0 10 20 30 40 Activity (hours) 3 2. Variable costs: these are costs that vary in direct proportion to changes in the
level of activity (volume). If a factory shuts down and stops production
completely, no variable costs will be incurred. Examples of variable costs include
direct materials (flour in bread), direct wages (payment to production employees
for time spent working), direct expenses (maintenance costs of production
machine) and petrol consumption by vehicles.
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0 5 10 15 20 Activity (number of units) The total variable costs increase as activity (number of units) increases.
3. Semi-variable or Semi-fixed Costs: these are costs that contain both fixed and
variable costs. In other words, the costs are not perfectly fixed or perfectly
variable. Telephone costs, for instance, contains a fixed sum as rental for a period,
say one month, and variable costs for metered calls.
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0 5 10 15 20 Activity (number of units) The semi-variable cost is made up of a fixed and a variable cost element. 4 4. Step Costs: these costs are fixed over a range of activity and then rise to a new
level as activity changes. For instance, a production supervisor may supervise a
given number of workers. As the number of workers increase due to increased
production it is necessary to hire another supervisor. Therefore, the supervisory
salaries are step costs. Most fixed costs are in fact step costs. For instance, rent
will increase as the level of activity increases as more space is required. Again,
depreciation on machines may increase with an increase in the level of activity as
more machines are required. Some variable costs may be step costs. Labour cost,
for instance, increases suddenly at different levels of activity as their recruitment
comes in lumps. Total Cost
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Step costs remain fixed over a range of activity.
Costs are classified by function to which they relate.
e) f) Production Costs: are costs incurred from the time of acquisition of material until
the despatch of completed items to store or warehouse.
Administration Costs: are costs incurred in the general administration inclu...
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- Fall '13