Costs Categories in Incremental Analysis

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Six categories of costs

Incremental costs are those costs related to the increasing trend in the production of a given firm. Generally, incremental costs consist of variables costs used in determining the additional costs incurred during the process of production (Burt, Petcavage & Pinkerton, 2010). There are various types of costs used in the calculation of a firms cost structure in a given operational period. They include the following:

Fixed costs-as the term describes, fixed costs consist of all costs incurred once in a given financial period usually remaining a constant over the process of production. This type of cost does not change with changes in the level of a firms production. Classic examples include rent, license expenses, and costs incurred in the purchase of initial capital equipment for production purposes.
Variable costs, on the other hand, include all costs whose value changes considerably with changes in production or microeconomic elements such as inflation, increased labor costs among others.
Average costs represent the costs per unit of the production of a given firm or business. Average costs tend to increase with an increase in the quantity of production. This is so because average costs include variable and fixed costs (Burt, Petcavage & Pinkerton, 2010). Therefore, as variable costs increase, the overall effect implies an increase in the average costs during the production period.
Marginal costs-they consist of all costs experienced by firms due to an additional unit of production. To demonstrate this scenario, let us take the case of a firm whose costs remain constant up to a given level of production. Beyond this level, this firm experiences incremental costs on top of every additional unit produced. The additional costs in this case represent the underlying marginal costs in that production process.

Indirect costs- they include costs incurred outside the production process such as employee insurance plans.
Direct costs consist of all costs directly involved in the production of goods. They include material costs and fixed overhead costs.

Costs used in Incremental Analysis

This form of analysis involves the determination of costs due to changes in the phenomenal production of a given firm. Since incremental analysis is significant because the overall profit components of a firm shall determine d by the nature and magnitude of incremental costs (Drury, 2007). In this case, costs necessary in the incremental analysis will include the following:

Variable costs- during the calculation of incremental costs, variable costs are critical in establishing the changes in a firms cost structure. The fundamentals reason why variable costs remain essential in the incremental analysis is based on the fact this form of analysis seeks to determine variation in its costs and the possible trend. In order to establish this criticality, a firm would find it necessary to use variable production costs to aid the process (Burt, Petcavage & Pinkerton, 2010).

The other type of cost that would occupy a lot of space in the analysis of incremental costs is the variable cost. Since variable costs are characterized by changes in the nature of variable costs, analysts would draw numerous benefits in using them as one of the basic costs (Drury, 2007).

Choose a product and discuss it in terms of these six categories of costs in a one to two-page paper

A good example is the production of bulbs where it takes one expert to produce one bulb an hour. In this case, the simple incremental cost of a bulb would be the hourly wages and the costs of materials used in the production of one bulb. The marginal costs would include costs incurred due to one additional bulb is produced by a given expert employee. The fixed costs will be rent and production licenses. Health insurance expenses shall constitute indirect costs. Electricity costs will fall under variable costs. The direct cost will include costs associated with the materials used in the production (Drury, 2007).

References

Burt, D. N., Petcavage, S. D., & Pinkerton, R. L. (2010). Supply management. (8th ed.). Boston: McGrawHill.

Drury, C. (2007). Management and Cost Accounting. New York, NY: Cengage Learning EMEA.

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Costs Categories in Incremental Analysis

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