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As another example, for a bakery the monthly rent and phone line are fixed costs, irrespective of how much bread is produced and sold; on the other hand, the wages are variable costs, as more workers would need to be hired for the production to increase. For any factory, the fix cost should be all the money paid on capitals and land.
Indirect materials cost: Indirect materials cost is the cost associated with consumables, such as lubricants, grease, and water, that are not used as raw materials. Other indirect manufacturing cost: includes machine depreciation, land rent , property insurance , electricity , freight and transportation, or any expenses that keep the factory ...
Managers must understand fixed costs in order to make decisions about products and pricing. For example: A company produced railway coaches and had only one product. To make each coach, the company needed to purchase $60 of raw materials and components and pay 6 labourers $40 each. Therefore, the total variable cost for each coach was $300.
He gave the example of Belgium, where price cuts took effect on Feb. 1—IKEA was able to significantly lower prices on parcel deliveries from €9.99 ($10.81) to €2.99 ($3.24).
The U.S. Boeing KC-46 Pegasus contract was a fixed price contract. Due to its history of cost overruns, it is an example of how fixed price contracts place the risk upon the vendor, in this case Boeing. Total cost overruns for this aircraft have totaled about $1.9 billion. [10]
In TOC, operating expense is limited to costs that vary strictly with the quantity produced, like raw materials and purchased components. Everything else is a fixed cost , including labour (unless there is a regular and significant chance that workers will not work a full-time week when they report on their first day).
Direct materials cost the cost of direct materials which can be easily identified with the unit of production. For example, the cost of glass is a direct materials cost in light bulb manufacturing. [1] The manufacture of products or goods requires material as the prime element. In general, these materials are divided into two categories.
1. The Average Fixed Cost curve (AFC) starts from a height and goes on declining continuously as production increases. 2. The Average Variable Cost curve, Average Cost curve and the Marginal Cost curve start from a height, reach the minimum points, then rise sharply and continuously. 3. The Average Fixed Cost curve approaches zero asymptotically.