Supply Chain - Six Catagories of Cost - Essay Example

Paper Introduction In business, cost is often viewed as a monetary valuation of material, effort, time consumed, resources, risks incurred and the delivery of goods and services among others. All expenses can be seen as costs, but not all the costs such as the ones incurred in the acquisition of income generating assets are expenses. Variable manufacturing cost (direct labor)The word “variable manufacturing cost” is applicable to business methods to track business profits and expenses. The specifics of variable costs may vary depending on the system used on the business.

Therefore, variable manufacturing cost refers to the total marginal costs, and the tendency of variations that occur in the costs of the associated units under production. This means that the cost of manufacturing a product is not always stable. The manufacturers should understand variable manufacturing concepts, and how a change in cost may lead to additional expenses or even reduce the production cost. The variable manufacturing costs that affect the entire process of manufacturing includes all the steps from the material cost, cost of the required electricity for production to the labor cost (Albrecht, et at 2010).

Fixed manufacturing costThe term “fixed manufacturing costs” describes the fees required in creating an item. Manufacturers must pay the fixed manufacturing cost in order to produce the goods. According to some business principles, fixed manufacturing costs are not always fixed permanently. They often change over time, but get fixed when related to the production quantity for the period which is relevant. For example, a company which has warehouse costs fixed over the period of lease, can have unpredictable and unexpected expenses, which are unrelated to the production.

Semi Variable costThis is an expense that contains both the fixed cost and the variable components. The fixed cost component shall represent the part of the cost which must be paid irrespective of the activity level achieved by the entity. The variable component of cost, on the other hand, is payable proportionate to the activity level (Drury, 2007). For example, in billing structure of a phone, there exists a monthly flat-rate charge, plus an overcharge of any bandwidth used which exceeds the flat rate.

Therefore, the flat rate is the fixed component of the cost, whereas the excess bandwidth becomes the variable component of the cost. Another example is employees who get compensated by commissions (Aryasri, 2008). There is usually a salaried element which happens to be the fixed cost and the commission which is the variable cost. Total production costIn accounting, total production cost is the total of the fixed cost, the variable costs as well as the semi variable costs. It can as well be defined as the total amount of expenses spent on a certain investment/production, including the investment cost/price, commissions and other transaction costs like taxes.

Direct cost (salaries)A direct cost is the sum of an amount that can be linked specifically with a project sponsored relatively with a percentage of accuracy (Drury, 2007). It is the cost that is directly attributed to the provision of services or manufacture of products. For example, salaries of project staff as well as the materials required for a certain project. Some of the important principles of charging direct costs include: they must be reasonable and consistently be treated as direct charges.

Indirect cost (overhead) Indirect costs are the services and activities which benefit more than one product/project, but cannot be traced directly to making of that final project/product (Drury, 2007). For example, it can be difficult to fully determine how some of the activities of a director/manager of an organization benefit a product/project. These costs do not necessarily vary within some production volumes, and so they are considered as fixed costs.Incremental cost analysisIncremental cost analysis can be defined as the overall changes that a certain company experiences when it produces one additional unit of good.

The variable manufacturing cost and the semi-variable cost as applicable to business, are used in making incremental cost analysis because the cost of manufacturing a certain product is not always stable. This is possible because the variable manufacturing costs that affect the manufacturing process includes all the steps from material cost to production of the product. The semi-variable cost, on the other hand, contains variable components. Therefore, the company will experience overall changes when additional changes occur.

Miscellaneous office supplies are a superb example of services which allocated directly or charged indirectly. This product increases when production increases. In this example, we assume that these variable manufacturing costs fluctuate in response to the hours of direct labor. These activities are often traced to projects whereby their costs get charged to projects on the grounds of an item by item. Works citedDrury, C. (2007). Management and Cost Accounting. Cengage Learning EMEA.Brian, B. (2007). Definition of Variable Manufacturing and overhead Efficiency Variance.

Demand media.Aryasri, (2008). Managerial Economics: Financial Analysis. Hill Education, Tata McGraw. Albrecht, S et at. (2010) Accounting: Concepts and Applications. Cengage Learning.