Chapter 28- Costs
Introductions – Who needs cost data?
Management decisions can cover a wide range of issues and they require much information before
effective strategies can be adopted. These business decisions include location of the operations, which
method of production to use, which products to continue to make and whether to buy in components or
make them within the business. Major uses of cost data include:
- Profit and loss cannot be calculated without accurate cost data. Location might be based on profits and
- Marketing needs accurate cost data in order to inform their pricing decisions.
- Costs records might also help to make comparisons with the past.
- Past costs data can help for future budgets and pricing.
- Resource use might be based on costs.
- Business performance is influenced by the cost as the manager decides what is best for the business.
What are the costs of production?
Calculating costs for each product is complex; therefore there are many different classifications. It is
important to comprehend cost classification. The most important ones are:
- Direct costs
- Indirect costs
- Fixed costs
- Variable costs
- Marginal costs
Cost of the meat in a hamburger.
Cost of mechanic in a garage.
Salary of a teacher in a school.
The most common costs in manufacturing are the costs of materials and labour.
Indirect costs Cost of tractor in a farm
Promotional expenditure in a supermarket
Rent to the garage
The cost of cleaning a school
How are costs affected by the level of output?
Not all costs will vary directly in line with production increases and decreases. Costs may be classified
Fixed costs: Costs that do not vary with the output in the short run.
Variable costs: Costs that vary with output, for example, materials used in making a washing machine or
the electricity used to cook a fast-food meal.