Cost terms and purposes
3 important questions on Cost terms and purposes
Cost drivers / Allocation Keys. Give examples of cost drives in connection to variable cost
- A cost driver is a factor, such as the level of activity or volume, that causally affects costs (over a given time span).
- The cost driver of variable costs is the level of activity or volume whose change causes the (variable) costs to change proportionately.
- i.e The number of bicycles assembled is a cost driver of the cost of handlebars.
Variable costs V(x) change in total in proportion to changes in the related level of total activity or volume. Give examples of different kind of variable costs
- Raw Materials
- Labour costs
- Energy costs
Fixed costs F do not change in total for a given time period despite wide changes in the related level of total activity or volume. Give examples of different kind of fixed costs
- Rents
- Management salary
- Interest cost on loans
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