Costing and Taxation

 


COST NOTES 

1. Types of Costs

A. By Behavior

Cost Type Description Example
Fixed Cost Does not change with production level Rent, Salaries
Variable Cost Changes in proportion to output Raw materials, Direct labor
Semi-Variable Has both fixed and variable elements Utility bills, Phone bills

B. By Traceability

Cost Type Description Example
Direct Cost Directly linked to a product Wood used in furniture
Indirect Cost Cannot be directly traced to one product Factory rent, Admin costs

2. Costing Methods

Method Description Use Case
Absorption Costing Includes all costs (fixed + variable) into product cost External financial reporting
Marginal Costing Includes only variable costs; fixed = period cost Short-term decisions, break-even
Activity-Based Costing (ABC) Allocates overheads based on actual activities Complex environments
Standard Costing Uses pre-set "standard" costs for planning/variance Performance evaluation

3. Key Cost Tools

📊 Break-Even Point (BEP)

  • Formula:
    BEP (units) = Fixed Costs / (Selling Price - Variable Cost)
  • Shows how many units must be sold to cover all costs.

📈 Contribution Margin

  • Contribution = Selling Price – Variable Cost per unit
  • Important for profit planning and CVP analysis.

TAX NOTES 

1. Types of Taxes

A. Direct Taxes (Paid directly to government)

Tax Type Applied To Example
Income Tax Individual or business income Salaries, freelance income
Corporate Tax Company profits Net profit of a business
Capital Gains Tax Profits from selling assets Real estate, shares

B. Indirect Taxes (Collected via intermediaries)

Tax Type Description Example
VAT / GST Tax on value added at each stage Sales tax at every level
Excise Duty On production of goods Alcohol, tobacco
Customs Duty On imported goods Imported electronics

2. Important Tax Concepts

A. Withholding Tax

  • Deducted at source before payment is made.
  • E.g., employer withholds income tax from salary.

B. Double Taxation Avoidance Agreement (DTAA)

  • Prevents income from being taxed twice in two countries.
  • Encourages cross-border trade and investment.

C. Transfer Pricing

  • Pricing between related companies in different countries.
  • Must follow arm’s length principle (fair market value).

3. Legal vs. Illegal Tax Practices

Practice Description Legal?
Tax Planning Using law to reduce tax ✅ Legal
Tax Avoidance Exploiting loopholes (not ideal) ⚠️ Legal but discouraged
Tax Evasion Hiding income or falsifying records ❌ Illegal


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