Running head: Describing Costs Within The Firm
Describing Costs Within The Firm
Introduction
Within the operation of any company, there are several types of costs that must be considered to achieve proper book keeping and accounting practices. Some of these different types of costs are direct costs, indirect costs, fixed costs, variable costs and sunk costs. To the lay person these various costs may be confusing, but once explained are helpful in knowing how the company must allocate and account for all the costs listed.
Fixed Costs
Fixed costs are the costs that all companies must pay regardless of sales or production levels. Building payments, depreciation and taxes are just a few of the fixed costs that are common to all companies. It is easy to see why the term fixed cost is used. The costs are unmovable and must be paid each month or year without exception
Variable Costs
Opposite of fixed costs are variable costs. Variable costs fluctuate with the rate of business being performed. For example, if production drops from 100 units down to 20 units, then material cost drops to the 20 unit level. Another good example of variable cost is electricity bills. All companies must pay a general electricity bill which includes line maintenance and general usage fees. However, if production increases to a point where more power is used then the cost of electricity increases. If usage decreases then so does the electric bill. Thus the cost is variable in the amount that must be paid but fixed in that some amount will have to be paid for having the service.
Direct Costs
Direct costs are costs that can be identified specifically with a particular sponsored project, an instructional activity, or any other institutional ...