Costing Concepts



Costing Concepts

Introduction

Cost of a product or an operation can be classified into several different ways. One of these types is 'cost behavior'. Knowing the cost behavior is useful in the management of a company for a variety of purposes. The cost behavior refers to the kind of cost on the basis of their nature. This nature of the cost represents whether the cost is permanent along the process or it varies from unit to unit or process to process. These costs are briefly discussed below:

Variable Cost

When the activity level is measured in units produced, direct materials costs and direct labor costs are generally classified as variables. Variable costs are costs that vary in total in proportion to changes in activity level.

Fixed Costs

When the units produced is the measure of activity, examples of fixed costs include straight-line depreciation of manufacturing equipment, certain machinery and plant equipment, salaries of supervisors, etcetera. Fixed costs are costs that remain the same in total even and that the level of activity changes.

Mixed Costs

A mixed cost has the characteristics of both a fixed cost as a variable. For example, given a range of activity, the overall cost can remain mixed well. It then behaves as a fixed cost. On another range of different activities, the cost can change mixed in proportion to activity levels. It then behaves as a variable cost. Mixed costs are sometimes called semi-variable or semi-fixed costs.

Discussion

Every business basically satisfy needs and wants of customers by selling one product or service for more money than it costs to produce it. The advantage you get with the price is used to cover the costs and to obtain a profit.

Most employers, especially small businesses set their prices of sales from the prices of their competitors, not knowing if they reach to cover the costs of their businesses. The immediate consequence of this situation arising is that businesses do not thrive. Knowing the cost of business is a key element of the proper management business, for the effort and energy invested in the company give the expected results.

Moreover, there are business decisions that somehow does not affect the cost of a company. It is imperative therefore that the decisions taken are of sufficient quality to ensure the proper conduct of the same.

To prevent the effectiveness of these decisions do not rely solely on the good luck, but rather, is the result of an analysis of the possible consequences, each decision must be supported by three important aspects:

Knowing what the consequences techniques of decision.

Evaluate the impact on business costs.

Calculate the impact on the market that the company serves.

Differences between cost variable and fixed costs, and the effects of the change in the volume on them

Fixed costs are those that must be paid regardless of whether the company produces varying amount of products, as such leases are, that although the company is active or not have to pay, and produce 100 or 500 units must always pay the same value for concept of leasing ...