Fixed costs, Variable costs & Contribution 2

	management
	Accounting: Fixed costs, Variable costs & Contribution

This approach cuts across the classification system used for financial accounting since some manufacturing overheads will be fixed and some variable, and likewise some non-manufacturing overheads will be fixed and some variable with output. Total cost is therefore seen to be a 'semi-variable cost': that is, a cost which includes a fixed and a variable element.

Direct costs are usually assumed to vary directly with output. For direct materials and direct expenses, this is usually a fair assumption, however, for direct labour it is often questionable - were in doubt assumptions should be stated about its cost behaviour.

Frequently it is also assumed that non-manufacturing overheads are all fixed so that the variable manufacturing overheads and the direct costs (i.e. the variable product cost) can be considered the total variable cost of a product.

This simplification reflects the difficulties encountered when trying to identify any causal relationship between non-manufacturing costs and individual products (e.g., trying to directly attribute increased marketing expenditure to any one of a range of products that might benefit from it).