Cost Types in Break Even Analysis
Break Even Analysis is a Management tool in decision making and helps management to classify costs as FIXED or VARIABLE:
- Fixed costs are those cost that are not related to the volume of production, whereas
- Variable costs are those that change as the volume of out put in a production plant changes.
The cost of your electricity bill will in the case of your business be a variable cost. The longer hours you work to produce the product, the higher the electricity cost.
Remember, always that variable costs are those cost that vary directly with the level of output.
To be guided further, there is often a distinction between DIRECT VARIABLE COST and INDIRECT VARIABLE COST:
- Direct variable cost can be attributed to the production of a particular product line or service and allocated to a particular cost center (e.g., raw materials and direct wages, whereas
- Indirect variable costs cannot be directly attributed to a production line or service, but vary with output (e.g., depreciation.