Understanding Costs
What are costs?
There are many different ways to define the term ‘costs,’ but for this reference sheet, we can describe it as the amount of resources provided or consumed in exchange for production, goods or services. To elaborate, when we refer to the cost of a product, we are referring to how much capital or value has been used to create the product. And when we talk about the price of a product, this refers to how much money a consumer would need to pay to acquire it.
Clarification of costs
Fixed: Costs that do not vary within a budget period with differing levels of activity. Variable: Costs that vary with the level of activity.. Direct: Costs that can be identified directly with a product or cost centre and, therefore, allocated directly. Indirect: costs that cannot be directly identified with a particular product or cost centre and are, therefore, apportioned to cost centres/products according to a method of cost absorption. Controllable: Costs that are influenced by a budget holder or other member of the management team.
Future Practice Owner.
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