Classification of Costs

_Definition of a cost: physical quantity measurement multiplied by a price measurement.
Meaning of ‘activity’: generally, any physical operation that takes place in an organisation.
Meaning of 'output': Product or Service provided by the organisation.

_Variable costs and fixed costs:
- A variable cost is one, which varies directly with changes in the level of activity, over a defined period of time.
- A fixed cost is one, which is not affected by changes in the level of activity, over a defined period of time.
- Semi-variable = fixed + variable
- Step cost = fixed cost increases by steps. It is fixed over a specified level of activity, but will increase by a further level as the level of activity reaches a trigger amount.

_Examples of variable costs are:
- materials used to manufacture a unit of output or to provide a type of service.
- labour costs of manufacturing a unit of output or providing a type of service.
- commission paid to a salesperson.
- fuel used by a haulage company.

_Examples of fixed costs (or semi-fixed) are:
- Salary paid to a supervisor.
- Advertising in the trade journals.
- Business rates paid to the local authority.
- Depreciation of machinery calculated on the straight line basis.
Unit cost is decreasing as output increases, because the fixed cost is spread over more vases.
-Rent

_Examples of semi-variable cost are:
- Office salaries where there is a core of long-term secretarial staff plus employment of temporary staff when activity levels rise.
- Maintenance charges where there is a fixed basic charge per year plus a variable element depending on the number of call-outs per year.
- Telephone bill
- Electricity
- Sales person, commission + salary

_Examples of Step-Costs:
-Warehouse
- Paying that can work only in teams, and I have to hire a new whole team

_Direct costs and indirect costs:
- Direct costs: directly traceable to an identifiable unit, such as a product or service or department of the...