Direct Variable costs – A variable cost is a

Direct
costs – A direct cost is a price that can be completely credited to the
production of certain goods or services. Direct costs include wages whereas
indirect costs are associated with support labour such as factory workers who
maintain the equipment. Direct material costs are the costs of the raw
materials used to create a product.

 

Variable
costs – A variable cost is a corporate expense that changes in amount according
to production output. The variable costs increase or decrease depending on a
company’s production volume. As production increases the variable costs
increase too, as the production decreases the variable costs decrease too.

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Depreciation
– a reduction in the value of an asset over time, due in particular to wear and
tear.

 

Semi-variable
costs – Semi-variable costs are a mixture of fixed and variable components. For
example, Tesco supply a ‘Tesco Mobile Contract’ for customers who purchase a
phone with the company. In a phone bill contract there is a constant monthly
charge (in addition of overcharges based on over excessive usage). Also, their
employees may come across semi-variable costs in their salary which is usually
a fixed component in addition to a variable cost such as commission.

 

Stepped
costs – A stepped cost is a cost that doesn’t change gradually in accordance
with the changes in activity volume but rather at separate points. For example,
a Tesco branch such as Tesco Metro, Tesco Express etc. might serve a total of
40 customers within an hour by one employee. If the branch was to receive more
than 40 customers per hour they may need to pay the costs of having two
employees, increasing the costs of doing business.

 

Indirect
costs – Indirect costs are costs that are not directly liable to a cost object
such as a project, facility, product or function. Indirect costs can be either
fixed or variable costs. As a result, indirect costs
and expenses are often allocated to the department, product, etc. For example,
a manufacturing department that moulds plastic has some costs that are directly
traceable to it, such as the wages and fringe benefits of the direct labour
working exclusively in that department.

 

Fixed
costs – Fixed costs are costs such as rent, salaries, insurance etc. they are
costs which remain constant whatever the amount of goods are produced and/or
however much profit is made.

 

Cost
centres – A cost centre is often a department within a company to which costs
may be charged for accounting purposes. The manager and employees of a cost
centre are responsible for its costs but are not responsible for revenues or
investment decisions.

 

Profit
centres – A profit centre is a part of an organisation that is responsible for
assignable revenues and costs and hence ascertainable profitability. ‘Often a
division of a company is a profit centre because it has control over its
revenues, costs, and the resulting profits. Cost centres and profit centres are
usually associated with planning and control in a dispersed company’.

 

Non-production
(service) department overheads – Non-production (service) department overheads are
indirect costs such as administrative overheads that do not contribute directly
to the manufacturing cost/overhead. They include administration overheads,
selling overhead, distribution overhead, and research & development costs.

 

Overhead
allocation – An example of an overhead allocation is that businesses may pay
employees based on the direct labour hours charged against a product, or the
number of hours used by a machine during the production of a product; this is
known as the overhead rate when the amount of overhead allocation is charged
per unit. In many businesses, the amount of overhead to be allocated is
substantially greater than the direct cost of goods, so the overhead allocation
method can be of some importance. You need to allocate the costs of
manufacturing overhead to any inventory items that are classified as
work-in-process or finished goods. Overhead is not allocated to raw materials
inventory, since the operations, giving rise to overhead costs only impact
work-in-process and finished goods inventory.

 

Apportionment
– Apportionment is the Division and distribution of assets and/or liabilities
in proportion to the rights and interests of the parties involved. The division
of income and expenses in certain proportion and in contrast to an allocation,
two or more accounts, departments or entities.

 

Overhead
absorption rate – Overhead absorption rate is the amount of indirect costs,
which are assigned to cost objectives. Cost objects are items, which are items,
which are assembled with a cost such as customers, products, retail stores and distribution
channels. Indirect costs are costs that are not directly traceable to an
activity or product.

 

Absorption
costing – Absorption costing is a method of calculating the cost of a product
by taking into account overheads (indirect expenses) as well as direct costs. This
includes everything that comes under direct costs when producing goods as the
cost base.

 

Activity-based
costing – Activity-based costing is a method that analyses the activities in
which a business makes and then assigns indirect costs to the products. This method
recognises the relationships between costs, activities and products and by
this, indirect costs are assigned to products. This method is usually used
within manufacturing businesses, as it enhances the reliability of cost data,
reasoning why producing reliable costs help to better understand and classify
the costs incurred by a business throughout the production process.