Cost Concepts and Behaviour
Cost Concepts and Behaviour
Begin with the cost object
A cost can be direct to one object and indirect to another.
| Cost | Product model | Factory | Customer order |
|---|---|---|---|
| Battery used in a Cargo bike | Direct | Direct | Direct if traced |
| Factory supervisor salary | Indirect | Direct | Indirect |
| Special delivery requested by one customer | Indirect to product design | Indirect | Direct |
“Direct” means economically traceable to the chosen object, not physically touchable.
Four useful classification lenses
| Lens | Categories | Decision use |
|---|---|---|
| Traceability | Direct / indirect | Cost assignment |
| Behaviour | Variable / fixed / mixed / step | Forecast and CVP |
| Function | Production / selling / administration | Reporting and responsibility |
| Relevance | Incremental / avoidable / opportunity / sunk | Alternatives |
Do not substitute one lens for another. A fixed cost can be direct; a variable cost can be irrelevant if both alternatives incur it.
Northstar monthly cost map
| Item | Behaviour within 1,000–3,000 bikes | Traceability to model | Short explanation |
|---|---|---|---|
| Battery packs | Variable | Direct | One pack per bike |
| Assembly wages paid per unit | Variable | Direct | Change with output under the stated contract |
| Factory rent | Fixed | Indirect | Same total within current capacity |
| Electricity | Mixed | Mostly indirect | Base load plus machine use |
| Second quality supervisor after 2,500 units | Step-fixed | Indirect | Capacity changes at a threshold |
| Last year’s design study | Sunk | Depends on object | Cannot be changed by today’s choice |
Mixed-cost estimate
Maintenance cost was £18,000 at 1,000 machine hours and £24,000 at 1,600 hours.
High-low estimate:
Estimated cost equation:
At 1,300 hours, predicted maintenance is £21,000.
High-low uses only two observations. Plot the data, inspect outliers and use regression or engineering analysis when the decision warrants it.
The fixed-cost-per-unit trap
Factory rent is £120,000:
| Output | Total fixed rent | Rent per unit |
|---|---|---|
| 1,000 | £120,000 | £120 |
| 2,000 | £120,000 | £60 |
| 3,000 | £120,000 | £40 |
Lower unit cost does not mean Northstar saved rent. It spread the same total across more units. Producing unwanted inventory merely to lower unit cost can destroy cash and create write-down risk.
Relevant cost test
A number is relevant to a choice only if it is:
- future; and
- different between alternatives.
Opportunity cost is a sacrificed benefit and may not appear in the ledger. Sunk cost appears in records but is irrelevant to the choice. Neither visibility nor allocation decides relevance.
Quick check
Northstar owns an idle machine with a £50,000 carrying amount. It can use the machine for an order or rent it out for £8,000. Which amount is relevant?