Introduction
This paper will clarify the various terms used to describe costs, such as fixed, variable, direct, indirect, and sunk, giving examples of each to help a good understanding of current budget discussions. These concepts will help HR Management with an understanding of making effective budget decisions for its company, since they need to have clear and full knowledge of basic accounting language to grasp the concepts of the various accounting terms.
The term cost can be defined as the amount to be paid for products or services or a required payment for purchasing products and services used as a constant during a period. Costs can have different definitions, based on what kind of use it is required. They can be considered fixed or variable, direct or indirect, sunk costs, incremental or opportunities costs, as described below with the specific definition and example.
Fixed and Variable Costs
Fixed costs are the ones that do not vary with the number of goods produced, that do not change in proportion to the activity of a business within range if productivity, in an accounting period. They are known as the costs that a business must pay regardless of their sales or production levels. These costs do not grow or decrease and must be paid each month or year without exceptions. Examples of these costs are electricity, water, telephone, rent, lease, or mortgage, not related to the production. Normally, they are the costs related to the offices and places that keep running, not depending of having production or not.
In opposition of the fixed costs, the variable costs are the costs related to the production of goods and services, like raw materials, fuel for cars and machinery, labor and maintenance. Variable costs are the uncontrolled expenses that a ...