Cost Accounting: Fixed and Stepped Costs

Cost Classification

• Costs can be classified as fixed, variable, semi-variable, and indirect costs.

Fixed Costs

• Costs that remain unaffected by changes in the level of activity.
• Examples: rent, straight-line depreciation, and salaries of factory supervisors.

Stepped-Fixed Costs

• Fixed costs that change at certain levels of activity.
• Examples: electricity and water bills.

Variable Costs

• Costs that vary directly with the volume of output.
• Examples: raw materials, direct labor, sales commissions.

Semi-Variable Costs (Semi-Fixed Costs)

• Costs that contain both fixed and variable components.
• Examples: electricity and water bills, indirect materials, indirect labor, and indirect expenses.

Indirect Costs

• Costs that cannot be directly traced to the product.
• Examples: indirect materials (lubricants), indirect labor (salaries of office staff), and indirect expenses (heating and lighting for the factory).

Production Costs

• Costs related to the manufacturing of a product or provision of a service.
• Examples: costs found in the cost of sales section of the statement of profit or loss.

Non-Production Costs

• Costs not directly associated with the production of the business's output.
• Examples: administrative costs, selling costs, and finance costs.

Cost Behavior

• The way costs change as the level of activity changes.

Calculation of Product Cost

• Direct materials + Direct labor + Direct expenses = Prime cost/Total variable cost
• Prime cost/Total variable cost + Fixed production overheads = Total production cost
• Total production cost + Non-production overheads = Total cost