Types of Cost
- Direct Cost
A direct cost is a price that can be directly tied to the production of specific goods or services. A direct cost can be traced to the cost object, which can be a service, product, or department. Direct and indirect costs are the two major types of expenses or costs that companies can incur. Direct costs are often variable costs, meaning they fluctuate with production levels such as inventory. However, some costs, such as indirect costs are more difficult to assign to a specific product. Examples of indirect costs include depreciation and administrative expenses.
Direct Costs Examples: Any cost that’s involved in producing a good, even if it’s only a portion of the cost that’s allocated to the production facility, are included as direct costs. Some examples of direct costs are listed below:
- Direct labor
- Direct materials
- Manufacturing supplies
- Wages for the production staff
- Fuel or power consumption
Because direct costs can be specifically traced to a product, direct costs do not need to be allocated to a product, department, or other cost objects. Direct costs usually benefit only one cost object. Items that are not direct costs are pooled and allocated based on cost drivers.
- Indirect cost
Indirect Costs are costs that are not directly accountable to a cost object (such as a particular project, facility, function or product). Indirect costs may be either fixed or variable. Indirect costs include administration, personnel and security costs. These are those costs which are not directly related to production. Some indirect costs may be overhead. But some overhead costs can be directly attributed to a project and are direct costs.
There are two types of indirect costs. One are the fixed indirect costs which contains activities or costs that are fixed for a particular project or company like transportation of labor to the working site, building temporary roads, etc. The other are recurring indirect costs which contains activities that repeat for a particular company like maintenance of records or payment of salaries.
- Recurring Cost
A Recurring Cost is a regularly occurring cost or estimated cost which is documented with one record—a Recurring Cost record—that describes the income or expense and its pattern (how often it occurs, the rate at which it increases or decreases, the time period during which the cost applies, and so forth). Recurring costs are stored in the Recurring Costs table
Recurring Costs provide a means of quickly modeling the major components of your finances. You first establish a series of recurring costs to represent such items as tax expenses, estimated maintenance costs, and monthly income from leases. Once you enter this information, you can use these costs to generate Cost, Cash Flow, and Base Rent reports.
Recurring Cost Examples
Use recurring costs to:
- Record fixed expenses and income, or costs that change at a fixed rate – For costs that are fairly static, enter one Recurring Cost record describing the cost, rather than create individual Scheduled Cost records for each time you encounter this cost. For example, enter one Recurring Cost record describing your monthly rent for a year rather than enter 12 Scheduled Cost records for each rent bill. For costs that change at a fixed rate, complete the Yearly Factor field of the Recurring Costs table.
- Record estimates of your expenses and income – Rather than enter the exact amount of each monthly utility bill as a Scheduled Cost, enter a monthly estimate with a Recurring Cost record by completing the Period field with “Month”, the Amount-Expense with an estimate of the monthly bill, and the Start Date field. Since utilities are ongoing costs do not complete the End Date field.
- Model seasonal costs – If you incur landscaping costs only between April and September, create a Recurring Cost record for landscaping with a Seasonal Start Date of April 01 and a Seasonal End Date of September 01 (the year value is ignored). The system will only consider this recurring cost during the specified time frame.
- Non- Recurring Cost
Unusual charge, expense, or loss that is unlikely to occur again in the normal course of a business. Non recurring costs include write offs such as design, development, and investment costs, and fire or theft losses, lawsuit payments, losses on sale of assets, and moving expenses. Also called extraordinary cost.
- Fixed Cost
A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold. Fixed costs are expenses that have to be paid by a company, independent of any specific business activities. In general, companies can have two types of costs, fixed costs or variable costs, which together result in their total costs. Shutdown points tend to be applied to reduce fixed costs.
- Variable Cost
A variable cost is a corporate expense that changes in proportion to production output. Variable costs increase or decrease depending on a company’s production volume; they rise as production increases and fall as production decreases. Examples of variable costs include the costs of raw materials and packaging.
- A variable cost is a corporate expense that changes in proportion with production output.
- Variable costs are dependent on production output.
- A variable cost can increase or decrease depending on several factors, as opposed to a fixed cost which is one-time or constant.
The total expenses incurred by any business consist of fixed costs and variable costs. Fixed costs are expenses that remain the same regardless of production output. Whether a firm makes sales or not, it must pay its fixed costs, as these costs are independent of output.
Examples of fixed costs are rent, employee salaries, insurance, and office supplies. A company must still pay its rent for the space it occupies to run its business operations irrespective of the volume of product manufactured and sold. Although fixed costs can change over a period of time, the change will not be related to production.
Variable costs, on the other hand, are dependent on production output. The variable cost of production is a constant amount per unit produced. As the volume of production and output increases, variable costs will also increase.
Conversely, when fewer products are produced, the variable costs associated with production will consequently decrease. Examples of variable costs are sales commissions, direct labor costs, cost of raw materials used in production, and utility costs. The total variable cost is simply the quantity of output multiplied by the variable cost per unit of output.
There is also a category of costs that falls in between, known as semi-variable costs (also known as semi-fixed costs or mixed costs). These are costs composed of a mixture of both fixed and variable components. Costs are fixed for a set level of production or consumption and become variable after this production level is exceeded. If no production occurs, a fixed cost is often still incurred.
- Normal Cost
Normal costing is cost allocation method that assigns costs to products based on the materials, labor, and overhead used to produce them. In other words, it’s a way to find the price of an item that is being produced using three different cost factors (which make up the product cost).
The product costs that make up normal costing are actual materials, actual direct costs and manufacturing overhead. The materials and direct costs are the true costs that are associated with producing the item such as raw materials (the materials that make up the product) and labor.
- Expedite Cost
“Expedite Fees” are fees added to another fee, often a fee for service, to ensure that the service provided will be expedited, meaning that it will be provided sooner than the same service would be provided without such a fee.