Explain how an organization can cost a product and determine its price at any activity level

1086 Words Dec 23rd, 2013 5 Pages
For this task I will explain how a product price is determined and how this is calculated at the activity level of the product in the shop.

- Costs can be divided into different concepts. Below I will explain those concepts and give an example of how it will work in practice.

o Direct costs
Direct costs are the costs that are directly linked to a cost object. You can also say, the costs that are made when making the product ready. All the costs of making the product ready for sale are the direct costs of the product. There will be only direct costs in a company when they making products, otherwise there are no direct costs.
- Labour costs are direct costs; the costs paying the employee for his work on the product.
- Costs for the
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This time of years an equipment in the company will work is called ‘’life’’.

o Semi-variable costs
Also there are semi-variable costs, those are half variable and half direct costs. An example of this could be the costs for water, water is needed for the employees to use in the company for cleaning their hands or to drink during the breaks, but if you have a factory that needs to cool down products that comes straight from the oven with water, then you use the water also for making the product and then it is a direct costs, so that’s why they call it semi-variable costs.

o Stepped costs
Stepped costs are those where costs increase by a large amount at one time, rather than a gradual increase. For example, a company employs five staff to manage its production; the main cost of these staff is their wages. The costs are known because the wages are the same each week and month. However, after six months the company decides to employ another three staff. Although the costs will also be know because the wages are the same each week and month, the cost of wages has gone up in a block – from five to eight staff members. The costs have not increased gradually. These eight workers will now be able to cope with the new production needs, but if further staff are needed later due to production increases, this would be another stepped cost.

o Indirect costs
Indirect costs are, which is by direct costs, not particular linked to one product. Indirect costs