Immediately to another fixed level once the output

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immediately to another fixed level once the output band changes (a stepped cost)? These different bases of cost classification are summarized in the diagram below: Manufacturing/ Non-manufacturing Fixed/Variable incremental/sunk Direct/indirect historic/opportunity Cost Behaviour Functional Classification Avoidable/unavoidable Controllable/ Uncontrollable Standard/actual In our course, we will always refer to either of these terminologies every now and then, in different cost accounting situations. You will also meet them extensively in Management Accounting in the advanced stages of your course, where you will utilize their distinction to make appropriate profit maximizing management decisions as well as budgetary planning and control. Remember, a cost is simply a quantification or measurement of the economic sacrifice made to achieve a given objective. It is therefore a measurement of the amount of resources sacrificed in attaining a specified goal. 2.2 Importance of cost classification Analysis of cost behaviour is important to all organizations for effective management. This is because many organizations have a unique cost structure. For example, fixed costs account for 60 – 80% of all hospital costs. However, unlike many organizations of this type, labour costs largely comprise the hospital’s fixed costs.
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Cost Classification and Estimation 20 S TRATHMORE U NIVERSITY STUDY PACK Labour costs unlike depreciation require a cash outflow. This is characteristic of labour intensive organizations. Capital-intensive organizations, on the other hand, have low labour costs, e.g. computerized manufacturing organizations. Some organizations e.g. hospitals allocate 10 –15% of their space for standby emergency events giving them built in idle capacity. This prevents them from enjoying advantages of higher profits that a capital-intensive organization realizes at higher volumes beyond the break-even volume. Thus the cost structure of healthcare institutions presents challenges to accountants because of their labour intensive and capital-intensive characteristics 2.3.1 Manufacturing Vs. Non Manufacturing costs: ¾ Elements of Manufacturing costs: Manufacturing costs are the costs incurred to produce a product. Remember that a product refers to both goods and services. The elements of manufacturing costs are : ¾ Material costs, ¾ Labour costs; and ¾ Overhead costs. These elements make up the total cost of a product, as shown below: Total product cost = Material cost + Labour Cost + overhead cost These costs are discussed further in the following sections. a) Material costs ; Material refers to all the physical inputs into the production process. They include the following: - Raw material refers to bought in material which is used in the manufacture of the product. According to the organization raw material may further be classified as steel, timber e.t.c.
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