COSTS Classification of Costs ACCOUNTING & FINANCE Department of Economics and Business BIS

Fixed and Variable Costs Fixed Costs Costs which stay the same in total even if output increases or decreases. Examples: rent, salaries, insurance, interest on loans. No output – costs still have to be paid. Examples: rent, salaries, insurance, interest on loans. No output – costs still have to be paid.

Fixed and Variable Costs Fixed Costs Fixed Costs of a Car Example Fixed costs of a car: Road tax 10,000bt Insurance 20,000bt Depreciation 50,000bt. Would not change whether miles travelled were 10, 1,000 or 10,000. FC (80,000) Miles (ooo ’ s) (000 ’ s)

Fixed and Variable Costs Variable Costs Costs that change according to level of output / quantity produced. ‘ True ’ variable costs – change in direct proportion to output. Examples:raw material costs?.

Fixed and Variable Costs Variable Costs Variable Costs of running a Car Variable costs of a car - petrol used per mile. At 10bt per mile At 5,000 miles = (5,000 x 10) At 10,000 = 100,000. Cost of petrol increases in direct proportion to miles travelled. ( VC = 100,000) Miles (ooo ’ s) (000 ’ s) Example

Some vary according to output, but not in direct proportion. eg advertising, stationery, postage. However for simplicity we assume that all variable costs rise in exact proportion to output ie 50% increase in output= 50% increase in variable costs Some vary according to output, but not in direct proportion. eg advertising, stationery, postage. However for simplicity we assume that all variable costs rise in exact proportion to output ie 50% increase in output= 50% increase in variable costs Fixed and Variable Costs Semi Variable Costs

Direct and Indirect Costs Direct Costs Directly relate to production of particular product or process, eg raw materials, packaging, wages of production staff. Directly relate to production of particular product or process, eg raw materials, packaging, wages of production staff.

Direct and Indirect Costs Direct Costs Most direct costs are VC, but …… Some direct costs are FC which directly relate to a specific product or process eg depreciation on machinery, marketing of a specific product. Most direct costs are VC, but …… Some direct costs are FC which directly relate to a specific product or process eg depreciation on machinery, marketing of a specific product.

Do not directly relate to a particular product or department, eg rent, insurance, wages of office staff, depreciation of office equipment, general marketing. Do not directly relate to a particular product or department, eg rent, insurance, wages of office staff, depreciation of office equipment, general marketing. Direct and Indirect Costs Indirect Costs or Overheads

Direct and Indirect Costs Indirect Costs or Overheads Usually the same as fixed costs, but … Some costs are indirect and variable eg energy. Often these costs are referred to as overheads Usually the same as fixed costs, but … Some costs are indirect and variable eg energy. Often these costs are referred to as overheads