# Fixed costs, variable costs, direct costs and indirect cost

////Fixed costs, variable costs, direct costs and indirect cost

## Fixed costs, variable costs, direct costs and indirect cost

### ZIMSEC O Level Business Studies Notes: Business Finance and Accounting: Fixed costs, variable costs, direct costs and indirect cost

• Cost accounting is the accounting function concerned with calculating costs
• Cost is an amount that has to be paid or given up in order to get something
• In business costs are expressed in monetary terms
• In this discussion costs include:
1. Labour costs
2. Raw material costs
3. Overhead costs among other things
• In order to make various decisions for example setting the price of products or budgeting
• It is important to know and understand the nature of costs involved
• This involves classifying costs
• There are two basic methods of classifying costs:
• Grouping costs by type i.e Direct and Indirect costs
• Grouping costs by their behavior i.e. Fixed and Variable costs
• While there are other more sophisticated ways of classifying costs the Ordinary Level student should only concern themselves about these

#### Classification by type

• Here a cost is examined with consideration as to whether or not they are associated with the actual production of the product or not
• Direct Costs- are expenses that can be traced directly to (or identified with) a specific cost center or cost object such as a department, process, or product
• Examples include the cost of raw materials used in production for example sugar and flour to a baker you can touch and taste both in the final product
• Indirect costs-refers to those production costs that cannot be attributed or identified to a specific cost center or cost object such as a department, process, or product
• These are also known as production overheads
• Examples include: factory lighting expenses, lubrication etc you cannot see these for example in a loaf of bread
• Indirect costs are jointly shared while direct costs can be traced and are caused by specific product

#### Classification by behavior

• Classification of costs by behavior examines the impact of changes in output/level of production on a given cost
• Accordingly there are:
1. Fixed costs and
2. Indirect costs

Fixed Cost Curve

• Fixed costs- these are costs that remain unchanged when the level of production changes at least in the short run
• These costs remain constant irrespective of the level of production
• Examples include rent, interest payments, depreciation, insurance, salaries of supervisors
• If a baker pays rent for example it is unlikely to change due to the number of loaves of bread he makes

Variable costs curve

• Variable costs- these are costs change in response to changes in the level of production/output
• Usually they vary directly with output/level of activity
• If more units are produced the costs increase
• Examples of such costs include:
• cost of raw materials, royalties and patents etc
• It is important to note that fixed costs are fixed in the short run
• Short run – a indeterminate period of time that is only long enough to allow some factors to be changed but not others e.g. a month, year etc
• For example if the baker’s level of production exceeds a certain level he might need to rent additional space in order to house new equipment etc
• This would mean rent which is normally fixed would increase (change)
• But it would normally take the baker at least a month to acquire the additional space
• Hence the short run period in this example would be one month

#### Cost per unit

• In costing it is important to determine the cost per unit
• This is the fixed or variable cost per each unit
• While total variable costs per unit varies the variable cost per unit is fixed

To access more topics go to the O Level Business Notes

By |2017-07-08T09:59:30+00:00July 8th, 2017|Notes, O Level Business Studies Notes, Ordinary Level Notes|Comments Off on Fixed costs, variable costs, direct costs and indirect cost

### About the Author: Garikai Dzoma

He holds an Honours in Accountancy degree from the University of Zimbabwe. He is passionate about technology and its practical application in today's world.