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Is it true:
1) Material cost is the cost of purchasing the raw material from the market?
2) Labour cost is the cost of wages or salaries paid to labour for their work?
3) Variable overhead cost is the cost of other things of a product such as paint, oiling, furnishing etc.
4) Fixed cost is not directly related to manufacturing of a product rather it is non-production costs such as: rent / insurance / fees etc.
5) Please explain more about what is variable overhead and fixed overhead?
1. Yes
2. Yes
3. Yes, if the costs vary with the level of production.
4. No. There can be fixed costs of production (e.g. the rent of the factory).5. No. This is all explained in detail in my free lectures, and you cannot expect me to type out my lectures again here 🙂
The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
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Thanks for your last answer 🙂 I watched your lecture. This is what I understood. Please say are they all correct?
1) Variable overheads are costs which vary with a change in the level of activity. They are simply the other costs of the product other than material cost and labour cost. Examples include paint, lubrication etc.
2) Fixed overheads are costs which remain constant with the change in activity levels. Although there can be production fixed cost (as u say) plus non-production fixed cost which includes indirect material, indirect labour, indirect expenses. For example, depreciation on fixed assets, rent of factory, insurance of factory etc.
3) Semi-variable costs are costs which have both variable & fixed elements. So how do we report their each part in variable & fixed overheads. Should we report variable part into variable OH and fixed part into fixed OH?
4) There are 4 basic elements of the COGS such as: direct material / direct labour / variable overheads / fixed overheads.
5) But there can be other categories too in the COGS like (semi-variable cost / direct expenses / other expenses) seperately from those 4 basic costs classification?
1. No. Materials and labour are also variable costs.
2. Correct
3. It is only when doing marginal costing that we need to keep variable costs separate from fixed costs, and that obviously included the variable part of semi-variable costs.
4. OK, but I don’t understand why you are bothered.
5. No.
I do suggest that you watch the lectures again.
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