Types of Cost
Cost could either be fixed, variable or
semi-variable
i. Fixed Cost: is any
cost or expenses that are fixed irrespective of the level of activities attained.
Fixed cost per unit decrease as output increases. Examples are rent of factory
building, managerial salary etc.
ii. Variable
Cost: Is any cost or an expense that varies with the level of activities,
variable cost per unit remains constant. Examples of variable cost are raw
material, wages
etc.
iii. Semi-Variable Cost: These are costs
that behaves sometimes like variable cost and some other times like fixed cost.
They are example of expenses which contains both a fixed-costing it is fixed
and as time goes on it begins to vary with level of activities for example
telephone charges, electricity bills. The fixed cost element shall be a part of
the cost that needs to be paid irrespective of the level of activity achieve by
the entity. On the other hand the variable cost component of the cost is
payable proportionate to the level of activity. It shows similarities to
telephone bills. One must pay line rental and on top of that a price that
depends on how heavy one is using the service. So it changes with output.
Another example is satellite television. A price for the box must be paid
monthly and to get additional movies, more money has to be given cost of
energy, such as electricity, is a good example as it is integral to production
of goods and services. This component straddles both fixed and variable universe,
because electrical power is essential for the basic operation of the business
in lighting and heating – this portion is a sunk cost that is forgone
regardless of production.
As demand ramps up, more energy is acquired to ramp
up the production process in the use of machinery or large banks of computers
for instance. Cost of electrical energy will then rise accordingly as
production activities increase.
Therefore, the cost of electricity can be viewed as
semi-variable. Another example is salaried employees who are also compensated
by commissions. This group is paid on a fixed salary plus they are also
rewarded based on the volume of sales they can generate, or other forms of
quantitative measures based on revenues to the firm.
Semi-variable cost is partly fixed and partly
variable example which is cost of supervision and inspection, repairs and
maintenance. These costs remain fixed up to a certain limit of output, but as
soon as that level of activity is exceeded these costs tend to vary.
iv. Step fixed cost: These are costs that
react whenever the budget level of activities is exceeded.
No comments:
Post a Comment