Types of Costs in Business

A business, throughout its course, is most likely to incur these types of costs. Here are the following.

Fixed costs. As the name suggests, fixed costs are costs that remain the same and do not change regardless of a change in production level or sales volume. A fixed cost may be regarded as an encumbrance to a business wherein to reach break-even point, a business must sell it s product or service at a high profit.
Indirect costs. This type of cost is very different and cannot be associated with any particular type of product, product line or service. For example, in an automobile business, the benefits for, or cost of labor of an auto manufacturer is outright treated as a cost, but it cannot be added to any of the business’s vehicles. A business has to come up a method in the allocation of indirect costs to various products, business units, sources of sales revenues and many others. More often than not, methods in allocating direct costs may end up becoming different in one way or another which is why business managers and accountants alike must always pay attention on the allocation methods applied in treating indirect costs and take the resulting cost figures of these methods with a careful and calculated approach.
 
Irrelevant costs.  These are costs that should be dismissed when taking on a future strategic business course. Irrelevant costs are usually costs that have already been incurred in the past which were a product of a wrong decision. Irrelevant costs are that which you would avoid in a business’s upcoming undertakings.

Relevant costs. These are costs that a business can incur in future time, depending on a business’s strategic plan or course. For example, if an airline industry wishes to double its number of flights at a given day but the cost of fuel goes up, then such a cost must be properly considered.

Variable costs. The increase or decrease in variable costs is proportionate to the change in sales volume or production output.

Direct costs. These are costs that can be directly attributed to a business’s product, product line or service, to a source of sales revenue, or a business unit or operation of the business. For instance, if a business is on lumber supply, an example of a direct cost will be the cost of hardwood. On the other hand, direct costing is a method wherein only the variable cost is allotted to the inventory and cost of goods sold. Fixed costs are treated as expenses for the period that it was incurred. Direct costing can be used for internal financial statements but is not allowed externally. Fixed costs should be assigned to a business’s products in an external financial statement.