Types of Costs

Types of CostsDirect costs are those costs that cann be directlyattributed to a product or product line, or to onesource of sales revenue, or one business unit oroperation of the business. An example of a directcost would be the cost of tires on a newautomobile.Indirect costs are very different and can't beattached to any specific product, unit oractivity. The cost of labor or benefits for anauto manufacturer is certainly a cost, but itcan't be attached to any one vehicle. Each

business has to devise a method of allocatingindirect costs to different products, sources ofsales revenue, business units, etc. Mostallocation methods are less than perfect, andgenerally end up being arbitrary to one degree oranother. Business managers and accounts shouldalways keep an eye on the allocation methods usedfor indirect costs and take the cost figuresproduced by these methods with a grain of salt.Fixed costs are those costs that stay the sameover a relatively broad range of sales volume orproduction output. They're like an albatrossaround the neck of business and a company mustsell its product at a high enough profit to atleast break even.Variable costs can increase and decrease inproportion to changes in sales or productionlevel. Variable costs vary proportionately withchanges in production/

Relevant costs are essentially future costs thatcould be incurred, depending on what strategiccourse a business takes. If an auto manufacturerdecides to increase production, but the cost oftires goes up, than that cost needs to be takeninto consideration.Irrelevant costs are those that should bedisregarded when deciding on a future course ofaction. They're costs that could cause you to makea wrong decision. Whereas relevant costs arefuture costs, irrelevant costs are those coststhat were incurred in the past. The money's gone.