Various Types of Costs

  1. direct cost
    • tied directly to product/project
    • labour, raw materials, consumables, wages, fuel, etc.
    • All the direct efforts towards the project
  2. indirect cost
    • not directly linked to project but essential for business
    • These costs are relatively stable over time and easier to control
    • Utilities, consulting, legal and financial fees, administrative expenses, maintenance expenses, phone, internet, rent, insurance, etc.
  3. fixed cost
    • One off costs
    • These costs are not related to the duration of the project
    • e.g. One-time advertising Fees
  4. variable cost
    • Varies based on the length of your project
    • It's more expensive to pay staff salaries over a 12 month project than a 6 month one.
    • Valuation of stocks such as finished goods, work-in-progress is valued at variable cost only.
  5. Opportunity cost
  6. Sunk Cost
    • These have already been incurred.
    • This is a loss which should not play any part in determining the future of the project

  7. Relevant Cost

  8. Marginal Cost -> Marginal cost refers to the additional cost incurred by producing one more unit of a good or service.

  9. In other words, it's the cost of producing an additional item or unit of output.
  10. Marginal cost is important because it helps businesses make decisions about production levels.
  11. no variable cost is completely variable nor is a fixed cost completely fixed

Marginal Costing Terminology - Contribution : $$C = S - V $\(Where, C-> Contribution, S->Sales, and V-> Variable Cost\)\(C\ is\ also\ =\ F\ + \ P\)$Where, C->Contribution, F-> Fixed Cost, P-> Profit - Profit Volume Ratio (P/V Ration): - aka Contribution Ratio $\(Contribution\ Ratio\ = \ (Contribution\ /\ Sales) * 100\)$ - Break Even Sales $\(Break\ Even\ Sales \ = \ \frac{Total\ Fixed\ Cost}{P/V\ Ratio}\)$ - Required Sales to earn required profit$\(Required\ Sales\ = \ \frac{Total\ Fixed\ cost\ + \ Required\ Parts}{PV\ Ratio}\)$ - Break Even Point$\(\frac{Total\ Fixed\ Cost}{PV\ Ratio}\)$ - Break Even Quantity$\(BEQ\ = \ \frac{Total\ fixed\ Cost}{Contribution\ per\ Unit}\)$ - $\(\frac{Fixed\ Cost\ +\ Required\ Profit}{PV\ Ratio}\)$ - Divide the above value by SP unit - Divide the answer by maximum units producible in a day to get efficiency percent for this