In the beginning we will identify and explain main types of expenses. It is very important to understand what accounting is made of. Let's begin.
Main costs of production
• Direct costs • Indirect costs • Fixed costs
• Variable costs • Semi-variable costs • Marginal costs
1) Direct costs
These costs can be clearly identified with each unit of production and they increase with level of output. These are the costs that involved in direct process of making the good.
For example, direct costs for Pepsi are sugar, colorings , acids and many others.
For a garage fixing a car, a direct cost would be the labour - the cost of the mechanic.
2) Indirect costs
These costs cannot be identified with a unit of production because they are usually associated with producing a range of products.
They are often referred to as Overheads or Fixed Costs.
- For a supermarket it could be checkout people
- For running a school it could be the cost of heating it
Costs and the level of output
In the short-run (when the business can’t increase it’s capacity) costs can be further classified as follows.
• Fixed Costs (FC)
Definition – costs that are not changing with the level of output. They must be paid even if the output is ZERO.
Examples of Fixed Costs (FC):
Rent, Rates, Manager’s salary, interest payments
• Variable Costs (VC)
Definition – costs that increases with level of output (and vice versa)
- For Pepsi examples would be sugar, colorings , acids
- For taxi driver, the main would be petrol
The key point is that when output is ZERO variable costs are ZERO
(But FC still need to be paid)
Key points to remember:
- Direct costs are very similar to variable costs, therefore just remember that VC increasing/decreasing with amount of output.
More goods been produced higher the VC would be.
- Indirect costs almost the same as Fixed costs, therefore just remember that FC are fixed.
It means even if nothing is produced this costs still need to be paid e.g rent, electricity, salary
• Direct costs • Indirect costs • Fixed costs
• Variable costs • Semi-variable costs • Marginal costs
1) Direct costs
These costs can be clearly identified with each unit of production and they increase with level of output. These are the costs that involved in direct process of making the good.
For example, direct costs for Pepsi are sugar, colorings , acids and many others.
For a garage fixing a car, a direct cost would be the labour - the cost of the mechanic.
2) Indirect costs
These costs cannot be identified with a unit of production because they are usually associated with producing a range of products.
They are often referred to as Overheads or Fixed Costs.
- For a supermarket it could be checkout people
- For running a school it could be the cost of heating it
Costs and the level of output
In the short-run (when the business can’t increase it’s capacity) costs can be further classified as follows.
• Fixed Costs (FC)
Definition – costs that are not changing with the level of output. They must be paid even if the output is ZERO.
Examples of Fixed Costs (FC):
Rent, Rates, Manager’s salary, interest payments
• Variable Costs (VC)
Definition – costs that increases with level of output (and vice versa)
- For Pepsi examples would be sugar, colorings , acids
- For taxi driver, the main would be petrol
The key point is that when output is ZERO variable costs are ZERO
(But FC still need to be paid)
Key points to remember:
- Direct costs are very similar to variable costs, therefore just remember that VC increasing/decreasing with amount of output.
More goods been produced higher the VC would be.
- Indirect costs almost the same as Fixed costs, therefore just remember that FC are fixed.
It means even if nothing is produced this costs still need to be paid e.g rent, electricity, salary
|