Direct raw materials used to create a product.

Directcosts – A direct cost is a price that can be completely credited to theproduction of certain goods or services. Direct costs include wages whereasindirect costs are associated with support labour such as factory workers whomaintain the equipment.

Direct material costs are the costs of the rawmaterials used to create a product.  Variablecosts – A variable cost is a corporate expense that changes in amount accordingto production output. The variable costs increase or decrease depending on acompany’s production volume.

As production increases the variable costsincrease too, as the production decreases the variable costs decrease too. Depreciation- a reduction in the value of an asset over time, due in particular to wear andtear.  Semi-variablecosts – Semi-variable costs are a mixture of fixed and variable components. Forexample, Tesco supply a ‘Tesco Mobile Contract’ for customers who purchase aphone with the company. In a phone bill contract there is a constant monthlycharge (in addition of overcharges based on over excessive usage). Also, theiremployees may come across semi-variable costs in their salary which is usuallya fixed component in addition to a variable cost such as commission. Steppedcosts – A stepped cost is a cost that doesn’t change gradually in accordancewith 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 of40 customers within an hour by one employee. If the branch was to receive morethan 40 customers per hour they may need to pay the costs of having twoemployees, increasing the costs of doing business.  Indirectcosts – Indirect costs are costs that are not directly liable to a cost objectsuch as a project, facility, product or function. Indirect costs can be eitherfixed or variable costs. As a result, indirect costsand expenses are often allocated to the department, product, etc. For example,a manufacturing department that moulds plastic has some costs that are directlytraceable to it, such as the wages and fringe benefits of the direct labourworking exclusively in that department.

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 Fixedcosts – Fixed costs are costs such as rent, salaries, insurance etc. they arecosts which remain constant whatever the amount of goods are produced and/orhowever much profit is made.  Costcentres – A cost centre is often a department within a company to which costsmay be charged for accounting purposes. The manager and employees of a costcentre are responsible for its costs but are not responsible for revenues orinvestment decisions.

 Profitcentres – A profit centre is a part of an organisation that is responsible forassignable revenues and costs and hence ascertainable profitability. ‘Often adivision of a company is a profit centre because it has control over itsrevenues, costs, and the resulting profits. Cost centres and profit centres areusually associated with planning and control in a dispersed company’. Non-production(service) department overheads – Non-production (service) department overheads areindirect costs such as administrative overheads that do not contribute directlyto the manufacturing cost/overhead. They include administration overheads,selling overhead, distribution overhead, and research & development costs.  Overheadallocation – An example of an overhead allocation is that businesses may payemployees based on the direct labour hours charged against a product, or thenumber of hours used by a machine during the production of a product; this isknown as the overhead rate when the amount of overhead allocation is chargedper unit. In many businesses, the amount of overhead to be allocated issubstantially greater than the direct cost of goods, so the overhead allocationmethod can be of some importance. You need to allocate the costs ofmanufacturing overhead to any inventory items that are classified aswork-in-process or finished goods.

Overhead is not allocated to raw materialsinventory, since the operations, giving rise to overhead costs only impactwork-in-process and finished goods inventory. Apportionment– Apportionment is the Division and distribution of assets and/or liabilitiesin proportion to the rights and interests of the parties involved. The divisionof income and expenses in certain proportion and in contrast to an allocation,two or more accounts, departments or entities.  Overheadabsorption 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 distributionchannels.

Indirect costs are costs that are not directly traceable to anactivity or product.  Absorptioncosting – Absorption costing is a method of calculating the cost of a productby taking into account overheads (indirect expenses) as well as direct costs. Thisincludes everything that comes under direct costs when producing goods as thecost base.  Activity-basedcosting – Activity-based costing is a method that analyses the activities inwhich a business makes and then assigns indirect costs to the products. This methodrecognises the relationships between costs, activities and products and bythis, indirect costs are assigned to products. This method is usually usedwithin manufacturing businesses, as it enhances the reliability of cost data,reasoning why producing reliable costs help to better understand and classifythe costs incurred by a business throughout the production process.