Types of costs
The three ways of classifying a cost: direct or indirect with respect to a product, fixed or variable with respect to activity, includable, non-includable or notional; mixed costs and how to split out their fixed part.
- 25 cards
- 6 topics
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Each topic is weighted the way the exam weighs it.
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A few cards from the deck
Fixed cost: what is it?
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A cost whose amount does not move when the activity level changes, as long as the company's structure stays the same: rent, insurance, permanent staff salaries.
It is not fixed forever: it jumps in steps when capacity changes (a second warehouse doubles the rent). Per unit sold, however, it falls as volume rises.
A company rents a warehouse that can handle 1,000 parcels a month. To reach 1,500 parcels it must rent a second warehouse. What can be said of the rent?
- It is a step cost: constant as long as capacity is enough
- It is variable, since it rises when the number of parcels rises
- It remains a fixed cost, which never changes whatever the activity
- It becomes an indirect cost from the second warehouse onward
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It is a step cost: constant as long as capacity is enough
A fixed cost is fixed for a given structure. When capacity changes, it jumps a step. That does not make it variable: between two steps, it does not follow the parcels.
A cost is fixed or variable with respect to the …, and direct or indirect with respect to the product.
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A cost is fixed or variable with respect to the activity level, and direct or indirect with respect to the product.
The two classifications are independent: a fixed cost can be direct (the salary of a single product's developer) or indirect (rent), hence four combinations.