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74.2 Notes - 2 MANUF
74.2 Notes - 2 MANUF
GRADE 11
WEEK 23 - Lesson 2 of 16 74
MANUFACTURING
Variable costs These costs increase when the factory produces more products
VC and decrease when the factory produces less products.
Costs that change depending on number of units produced.
Example: Raw materials
This means that the costs will change depending on the number of
desks produced. One piece of wood will be needed for 1 desk
therefore 2 pieces of wood will be needed for two desks.
Therefore, the variable cost depends on the number of goods
produced.
There are other variable costs but we need to remember that
Direct material costs and Direct labour costs are always variable
costs.
Fixed costs These costs do not change even if the quantities produced by the
FC factory increase or decrease.
Fixed costs are the opposite of variable costs. Most overhead
costs are considered to be fixed costs as they do not change in
relation to the number of items produced.
Example: Rent
We will pay the same amount of rent for the premises no matter
how many items we produce. Even if we do not produce one unit,
the rent still remains the same amount.
REQUIRED
REFER TO ACTIVITY 1
Now classify the costs by making a tick in the appropriate columns. There may be more
than one tick.
Work done Direct Indirect Fixed Variable
by person costs costs costs costs
Factory worker
making the tables
Cleaner
Security guard
Foreman
Person looking
after the stock
BASELINE ACTIVITY 5
REQUIRED
Classify the costs by making a tick in the appropriate columns.
Fixed Variable
Cost costs costs
Rent
Raw material cost
Electricity
Insurance
Indirect labour costs
Depreciation
Cleaning materials
Indirect material costs
NOTE: There is a fixed monthly charge that needs to be paid for electricity even if no
electricity is used. The electricity consumption cost will thereafter fluctuate (increase or
decrease) according to the quantities produced.
These are costs of selling the finished goods (e.g. advertising, sales commission).
These are variable costs.
ADMINISTRATIVE COSTS
This is the cost of running the office where the administration and accounting is done.
These are fixed costs.
PRIME COSTS
WORK IN PROCESS
In a manufacturing business there are at any point in time products at various stages of
completion – “partly completed”.
BASELINE ACTIVITY 4
Factory worker X
making the tables X (not fixed –
there can be
overtime)
Cleaner X X
Security guard X X
Foreman X X
Person looking
after the stock X X
BASELINE ACTIVITY 5
Fixed Variable
Cost costs costs
Rent X
Raw material cost X
Electricity X
Insurance X
Indirect labour costs X
Depreciation X
Cleaning materials X
Indirect material costs X
Primary Costs
Factory overheads
Indirect materials