Fixed and variable costs

• Before a business can control its costs, management must have a clear idea of what those costs are.
• Fixed costs do not change when the level of activity changes – they must be paid regardless of what happens in the business. For example: salaries, insurance and lease.
• Variable costs are those that change proportionately with the level of operating activity in a business. For example: materials and labour.
  • Companies can usually decrease variable costs (through increased efficiency) e.g. JIT inventory management, new technologies.

Cost centres

• Cost centres are sections of a business to which costs can be directly attributed.
• Direct costs: can be allocated to a particular product, activity, department or region.
• Indirect costs: typically shared by more than one product, activity, department or region.

Expense minimisation

• Guidelines and policies should be established to encourage staff to minimise expenses where possible, for example, eliminate waste and unnecessary spending.
• Expenses reduce profits. – Savings can be substantial if people take a critical look at costs.