Commercial Applications
Answer
(a) Material Cost
Material cost refers to the cost of substances from which the product is made. Materials enter the production process and form part of the finished product. For example, paper used in a book, plastic used in a ball pen and timber used in furniture are materials.
Material cost is divided into two categories:
(i) Direct Material — Materials which become an integral part of the finished product and which can be easily measured and directly charged to the product. Examples include:
- Any raw material, semi-finished item or component used for manufacturing a particular item — e.g., cloth in dress making.
- Any material specifically purchased for manufacturing a particular product — e.g., colours for dyeing cloth.
- Primary packing materials — e.g., bottles used in Coke or Pepsi.
(ii) Indirect Material — Materials which cannot be directly assigned to a specific product but can be apportioned across several products. They do not form an integral part of the finished product. Examples include consumable stores, oil and waste, nails, grease, lubricants and cleaning supplies.
(b) Semi-fixed Costs
Semi-fixed costs (also called semi-variable or mixed costs) are those costs which vary but not in direct proportion to changes in the volume of production. They are a combination of fixed and variable costs — partly fixed and partly variable.
Such costs are neither perfectly fixed nor absolutely variable. The fixed component represents the cost of providing capacity, while the variable component is caused by using the capacity.
Example: The rent of a telephone is a fixed cost, whereas the charges for the calls made during a month are a variable cost (depend on how much the telephone is used). Together, the total telephone bill is a semi-fixed cost.