Cost Descriptors Memo For Mba 503

803 words - 3 pages

In our last Senior Management Team meeting I was asked to provide a clear definition of various terms used which were introduced in our budget discussion. The "cost descriptor" terms I will define are fixed, variable, semi-variable, direct, indirect, sunk, actual costs and opportunity costs.Fixed CostsA fixed cost does not vary. These are ongoing costs which remain relatively constant from month to month. Examples of fixed costs are rent, salaries, insurance.For example, our lease costs us $10,500 per month. This cost will be fixed for the duration of the lease.Variable CostsVariable costs are costs that are directly related to changes in production and are defined as the costs of goods sold, variable costs include raw materials, labor, and sales commissions. As volume of output increases so does the amount of materials needed as well as the costs of shipping and the additional cost of payroll for hourly staff.For example, when the number of students increases from 6,000 a year to 7,000 a year, the costs of the production and shipment of the textbooks will increase. If the number of students decreases, the costs of production and shipment will also decrease. The costs will vary depending on the number of students.Semi-VariableSemi-variable costs, or mixed costs, are costs that are partially fixed and partially variable.For example, utility bills, copier lease and telephone bills, these can start of off with a flat fee and incur a per-minute or another variable charge (going over the maximum number of copies for the copier) once a certain level is reached.The table below helps illustrate the differences in fixed, variable and semi-variable costs.OPERATIONAL COSTSFIXEDVARIABLESEMI-VARIABLELeaseTextbook production costsUtilitiesInsurance (building)Shipping chargesPhoneNon exempt SalariesHourly employee's payrollCopier leaseSupplies (paper)Direct CostsDirect costs are those that are directly attributable to the manufacturing of a product. For example, the direct cost for the production of student materials (the invoices received from our production outsourcing company) for the production and shipping costs for all courses are directly attributed to the cost of the production of the education material. Other direct costs are those paid to course developers for new courses or revision of old courses.Indirect CostsIndirect costs are not readily identifiable or attached to any one project but are necessary for the general operation of the organization. These would include facilities maintenance and administrative (wages and salaries) costs which can not be assigned to any one project. These costs are shared by all business objectives.DIRECT AND INDIRECT COSTSDIRECTINDIRECTInvoice payment to vendor for production and shipping of student...

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