A Generalized Learning Curve Adapted for Purchasing and Cost Reduction Negotiations

Table 1

Cost classification.

Cost item	Category	Description
Direct material cost	Variable	The materials (parts, and subsystems) that go into the final product
Direct labor cost	Variable	Constant productivity of people directly involved in production
Energy	Variable	Used primarily for production
SAG	Variable	Selling, administrative, and general costs
Commissions	Variable	Usually proportional to the quantity of goods sold
Shipping	Variable	Sometimes, a portion with the supplier and a portion with the buyer
R&D	Fixed	Research and development tasks
Fixed cost	Fixed	Amortization of capital goods, rent, depreciation of buildings and equipment, taxes on real estate, insurance, salaries of top management and operating personnel
Discretionary fixed	Fixed	Advertising, public relations, management development programs
IP acquisition cost	Quasi-fixed	Intellectual property design cost, licensing agreement, and royalty payment
Manufacturing overhead cost	Quasi-fixed	Maintenance and repairs on production equipment, heat and light, and depreciation
Indirect labor	Quasi-fixed	Discrete jump will happen when the overall scale of production drastically changes.
Profits	Quasi-fixed	Depending on pricing strategies