MEPX
Chapter 8 of 10All chapters
  1. 1What accounting is for
  2. 2The accounting equation
  3. 3The three statements
  4. 4Accruals and matching
  5. 5Profit against cash
  6. 6Bookkeeping in practice
  7. 7Reading the numbers
  8. 8Costs
  9. 9Controls and audit
  10. 10Reading a company report

Chapter 8 of 10

Costs

Fixed, variable and everything between.

Behaviour, not type

Fixed costs continue regardless of activity; variable costs scale with it. Classifying them correctly is what makes pricing and break even analysis meaningful.

  • Direct costs attach to a product; overheads support the whole operation.
  • Allocating overheads is a judgement call that changes apparent product profitability.

Sunk and marginal

Money already spent should not influence a decision. What matters is the extra cost and extra revenue of the next unit, which is where accounting meets economics.