Introduction Of Management And Management

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Management meeting

Small, medium or large companies, have one thing in common, make profit, and to make profit we need to make sure that the income has covered all the costs.
There are two types of costs, the direct ones, which are easy to identify as they are “directly” referred, linked to the product or service, which can be traced directly, straight and fully to the product, (e.g. material cost, labour cost, direct expenses, which are known as prime cost as well), generally, direct cost are considered, variable cost, as the cost increase when quantity/output increases, and indirect cost (overheads), which are not directly related with the production, but they are needed to proceed with the production, for example, in a coat manufacturing company, the leather is seen as direct cost, because is a prime material needed for the production, and traceable, while, for example, light and heating are not directly part of the final coat, but they were still necessary in order to finish the product, indirect cost are considered fix cost, as they do not change, if the production quantity increases or decreases.

So the reason why, companies normally charge indirect costs in addition to the direct ones, is to determine the total cost per unit (known as absorption), for then decide a selling price, so the income can cover all the expenses, thus generate profit.

Absorption costing: “means that all of the manufacturing cost are

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