Types of Cost

Fixed
costs:
Costs that don't change over a period of time and don't vary with output. E.g. s
alaries, rent, tax, insurance, heating and lighting. Fixed costs can also be cal
led indirect costs as they are not directly associated with the final product. F
ixed costs have to be paid even if the company is not producing any goods.
 Variable
costs:
Costs that vary directly with output so when output increases, variable costs al
so increase. E.g. raw materials, electricity. Variable costs can also be called
direct costs as they are directly associated with production.
Semi-variable
costs:
These costs have fixed and variable elements. E.g. a person working for the comp
any may have a fixed salary but may also earn commission on sales. Total costs a
re calculated by adding together fixed, variable and semi-variable costs.
 Sunk
Cost:
A sunk cost is an expense that cannot be recouped. For example, say a person spe
nt $50,000 on a degree in education and earns $60,000 as a teacher. She is later
offered a job in marketing that pays her $80,000. Though she may be tempted to
factor in her education degree as reason to stay in her current teaching job, he
r $50,000 degree is regarded as a sunk cost. She already spent this money, and i
t cannot be recouped. In this case, she should only compare the respective salar
ies of the positions. If all else is held equal, she should pursue the marketing
job.
 Opportunity
Cost:
An opportunity cost is the value of an alternative choice. For example, a colleg
e graduate is deciding between a job as a tech consultant in Seattle or an inves
tment broker in New York City. If the grad pursues the investment broker positio
n, the opportunity costs of foregoing the job in Seattle could be a slower pace
of life, $10,000 higher salary and lower costs of living like rent and food.
 Marginal
Cost:
A marginal cost is the amount it takes to produce one more item. Under this view
of costs, they vary along the production line and in most cases the cost to pro
duce a good reduces over time. Intuitively, this makes sense: the more proficien
t you become at producing a good, the faster you can do it and less waste is pro
duced. The savings in labour and material as you achieve ´economies of scaleµ means th
e cost of production usually decreases. The way economists find the marginal cos
t is by taking the derivative of the total costs as it relates to the total outp
ut.
 Direct
and Indirect Costs:
Two managerial accounting types of costs, direct and indirect, pertain to whethe
r a cost can be traced specifically to a cost object. For example, if a raw mate
rial of eggs is required for the making of a particular food item, it would be c
onsidered a direct cost. If the egg would be used in one of several types of bak
ed goods made by the manufacturer, it would be considered an indirect cost, sinc
e it can't be tied specifically to one object.
 Differential
Cost:
In managerial accounting, sometimes the manager must decide between two options.
Both options will be reviewed and the best of the two is, hopefully, chosen as
the winning solution. When comparing these two business options, costs will be c
ompared to see which one is more cost-efficient. This comparison of costs for bo
th options being considered is known as differential cost.
Production
costs:
Given a specific product version, production costs are usually classified accord
ing to their responsiveness to different levels of production attained
By: Sahil Bloch Jenish Kakadiya Aelis Rabara Chirag Chavda Priyank Siddhavat