PDSnet Glossary

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Definition

A cost in the books of a company which increases and decreases with their sales level. The main variable cost (also known as a "direct cost") is cost of sales. The cost of sales is calculated as opening stock plus purchases less closing stock. In other words, it is the stock which was used up during the period. Obviously cost increases as sales increase. Another possible variable cost is salesmen's commission because the more they sell generally the higher this cost will be. Fixed costs or indirect costs are those costs which have to be paid irrespective of the amount of sales made. These are items like salaries, rent, electricity and so on. In the Trading Account, variable costs are subtracted from the companies turnover (sales plus other incomes) to arrive at gross profit.

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