The selected organization is a manufacturing plant.
Fixed costs– Fixed costs do not vary with the changes in the amount of production or the level of activity.
When considering a certain capacity level, fixed costs would be constant. Within a specific level of activity, the total fixed cost would be the same. But the average fixed cost or the fixed cost per unit will decline when the activity level increases.
Ex: Building rent and rates for the plant, fixed rental of electricity bill.
Variable costs– This means the costs that change with the activity level. There is a direct relationship between the level of production and the variable cost. Total variable cost for a given activity level would increase if the activity level is increased and the average variable cost would be the same in any activity level. (Clinton, Merwe, Anton, 2006)
Ex: The cost of inputs like direct labor, direct material.
Step fixed costs– These costs would be constant over a certain activity level and when the level of production differs by equal intervals of units; the level of fixed cost would also change accordingly.
Ex: The electricity bill is a good example where the rate per unit is Rs.7.85 for a range of 0-62 units and the rate per unit is Rs.10 for a range of 63-93 units and the cost is Rs.27.75 for a range of 94-106 units.
Methods of Costing
Job Costing– Job costing is used to calculate the total cost of customized orders or unique products. In this approach, a job cost sheet would be used to calculate the total cost and profit or loss of the job with assuming the product or service delivered to be one job.
Ex: calculating the total cost of a onetime order of garments in a garment factory.
Contract Costing– This method of costing is used by construction companies to assess the total cost of construction works which are taken on contract basis. Here, each and every contract would be considered as a separate cost unit. (Clinton, Merwe, Anton, 2006)
Ex: construction of a new plant by a contractor.
Batch costing– When the production is arranged as a batch where a batch consists of a large quantity of identical products, the cost calculation would follow batch costing technique. In calculating the unit cost in this approach, the total cost of the entire batch would be divided by the number of units that are in a batch.
Ex: costing for a batch of garments of a customer.
Process Costing– Process costing can be used when there the production takes place as a sequence of activities organized in several stages. This method calculates cost at each level of production that the product goes through until the final product extraction.
Ex: The process of extracting gas from crude oil.
Service Costing– Service costing is used to calculate the total cost of providing a service in mass scale.
Ex: water supply and drainage service provision.