Supply Chain - Six Catagories of Cost Essay Example | Topics and Well Written Essays - 500 words

Supply Chain - Six Catagories of Cost - Essay Example This means that the cost of manufacturing a product is not always stable. The manufacturers should understand variable manufacturing concepts, and how a change in cost may lead to additional expenses or even reduce the production cost. The variable manufacturing costs that affect the entire process of manufacturing includes all the steps from the material cost, cost of the required electricity for production to the labor cost (Albrecht, et at 2010). The term â€Å"fixed manufacturing costs† describes the fees required in creating an item. Manufacturers must pay the fixed manufacturing cost in order to produce the goods. According to some business principles, fixed manufacturing costs are not always fixed permanently. They often change over time, but get fixed when related to the production quantity for the period which is relevant. For example, a company which has warehouse costs fixed over the period of lease, can have unpredictable and unexpected expenses, which are unrelated to the production. This is an expense that contains both the fixed cost and the variable components. The fixed cost component shall represent the part of the cost which must be paid irrespective of the activity level achieved by the entity. The variable component of cost, on the other hand, is payable proportionate to the activity level (Drury, 2007). For example, in billing structure of a phone, there exists a monthly flat-rate charge, plus an overcharge of any bandwidth used which exceeds the flat rate. Therefore, the flat rate is the fixed component of the cost, whereas the excess bandwidth becomes the variable component of the cost. Another example is employees who get compensated by commissions (Aryasri, 2008). There is usually a salaried element which happens to be the fixed cost and the commission which is the variable cost. In accounting, total