Cost on the Basis of Behaviour

Fixed costs are those costs that are fixed in volume for a certain level of output. They do not vary with output. They remain constant regardless of the level of output. Fixed costs include:

(i) Cost of managerial and administrative staff; (ii) Depreciation of machinery; (iii) Land maintenance, and the like. Fixed costs are normally short-term concepts because, in the long-run, all costs must vary.

 

Variable Costs are those that vary with variations in output. These include: (i) Cost of raw materials; (ii) Running costs of fixed capital, such as fuel, repairs, routine maintenance expenditure, direct labour charges associated with output levels; and (iii) the Costs of all other inputs that may vary with the level of output.

 

Semi- Variable Cost: A semi-variable cost is a cost that contains both fixed and variable cost elements. The fixed element of the cost will be incurred repeatedly over time, while the variable element will only be incurred as a function of activity volume.

Thus, a base-level cost will be always be incurred, irrespective of volume, as well as an additional cost that is based only on volume. This concept is used to project financial performance at different activity levels.

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By Hassham

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