Cost are classified as per variability into three categories:- Variable, fixed & semi-variable. Variable cost varies with the unit of production. Prime cost is variable cost. Apart from prime cost, a portion of overheads may also vary with production.
Fixed costs are basically overheads. They may be manufacturing overheads, administrative overheads, selling & distribution overheads etc.
For the purpose of classifying overheads as fixed and variable, it is necessary to study the nature of each and every cost element. If a sales man is given a salary which is partly fixed and partly variable, it is termed as semi-variable. Overheads are segregated into fixed and variable elements for proper classification.
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