Cost Classification

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Cost Classification

Introduction: In this assignment I will be discussing how costs incurred in any organization may be classified in a number of different ways for a number of different purposes. I will also be looking to find companies that use a variety of different costing techniques and methods. I will also be discussing the comparisons between marginal and absorption costing and how the concept of activity based costing can also be compared with these. To complete the assignment I will be using a combination of lectures notes, text books and the internet to research the various ways of cost classification, and how different companies use these, to enable me to answer the assignment question.


1. Cost classification
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Fixed costs are irrelevant for short-term decisions, as fixed costs do not change if more or less products or services are sold. For a business, fixed costs might be business rates, depreciation, insurance or rent. Variable costs vary in direct proportion to changes in the level of activity. This means that if the activity level doubles, then the variable cost will double. (Figure 2, Cost and Management Accounting 1, 1991, page 22)

Examples of variable costs are direct material, direct labour and direct expenses.
In comparison with fixed costs, variable costs do vary with the level of production or services provided. They are relevant for short-term decisions. In practice it is sometimes difficult to know which costs are fixed and which are variable. Some costs may have an element of both fixed and variable. This is called semi-fixed and semi-variable costs. 1.22 Semi-fixed costs

These are costs which are fixed for a certain level of activity but eventually increase by a constant amount at some particular point. For example, supervisors salaries-can cope with up to 1000 hours of activity per week, beyond which the costs will increase by 20% of the existing cost, for each increase in 1000 hours of activity (Management Accounting Techniques, 1994, page 5)

1.23 Semi-variable costs

These cost have both fixed and variable elements. For example, a telephone bill has a fixed line rental charge and
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