COSTS TERMINOLOGIES

Direct Costs are traceable or identifiable with the product/service. Indirect cost is not directly attributed to the product/service. Materials, labour and expenses can be direct or indirect.
Direct material costs- easily identified and measured e.g.

lumber to make tables.

Indirect material costs-it is difficult, costly and time-

consuming to measured the exact amount of the product. Thus, it is an estimated cost is used e.g. glue to make tables.
Direct labour costs- labour directly linked to the making of

products e.g. joiners who actually makes the tables

Indirect labour costs- labour costs which is indirectly

associated with the making of products e.g. supervisors salaries

Direct expenses - costs attached to the finished product other

than material and labour costs e.g. royalties, patents.

FIXED COSTS
This cost tends to remain constant even through activity levels changes. However, activity levels must change within a certain range. Examples of fixed costs are rent, depreciation and insurance costs. Example: ABC Ltd incurs fixed rental cost since it rents a warehouse for $5000 monthly and stocks 1,000 units.

FIGURE 1: FIXED COST GRAPH

1

(Extracted from http://faculty.bus.oregonstate.edu/caplan/Chapter04.htm)

60000 Total fixed cost 50000 40000 30000 20000 10000 0 100 500 900 Production level (units produced)

WHEN ACTIVITY/OUTPUTS INCREASESFIXED COST PER UNIT DECREASES. This is seen in Figure 2. FIGURE 2: FIXED COST PER UNIT GRAPH (Extracted from http://faculty.bus.oregonstate.edu/caplan/Chapter04.htm)

1000 Fixed cost per unit 800 600 400 200 0 50 100 150 200 250 300 350 400 450 500 Production level (units produced)

STEP COSTS
2

If the firms increase the units stored to 2,000, it fixed costs would increase to $10,000 monthly. This is called step costs. Step costs- this refers to the situation where fixed costs increases due to the activity level exceeding the range. As seen in Figure 3, the costs are fixed within a certain range. Once the range is exceeded the costs increases. FIGURE 3: STEP COST GRAPH (Extracted from http://www.unf.edu/~dtanner/dtch/dt_ch4.htm

VARIABLE COSTS
This type of costs changes directly with changes in activity level. As activity level increases, variable costs increase proportionately. If activity level decreases, variable costs decrease proportionately. For example, the costs of raw materials (lumber) would have to increase if the firm plans to increase the output of its finished products (the number of tables).

FIGURE 4: VARIABLE COST GRAPH (Extracted from http://faculty.bus.oregonstate.edu/caplan/Chapter04.htm)

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12000 Total variable cost 10000 8000 6000 4000 2000 0

10 0 50 0 90 0
900

Production level (units produced)

FIGURE 5: FIXED COST PER UNIT GRAPH (Extracted from http://faculty.bus.oregonstate.edu/caplan/Chapter04.htm)

12 variable cost per unit 10 8 6 4 2 0 100 500

Production Level (units produced)

As seen in Figure 5, the variable cost per unit is constant since costs changes proportionately with the activity level.

MIXED COSTS
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Costs consisting of both a fixed and variable cost element e.g. telephone costs, where a standard rental costs is charge in addition to the costs of calls made. FIGURE 6: MIXED / SEMI-VARIABLE / SEMI- FIXED COST GRAPH (Extracted from http://faculty.bus.oregonstate.edu/caplan/Chapter04.htm)

14000 Total cost 12000 10000 8000 6000 4000 2000 0

10 0 50 0 90 0

Production level (units produced)

Controllable - costs that can be controlled by managers. Non controllable costs- costs which cannot be controlled e.g. increase in the minimum wages, prices of raw materials, taxes.