The 23 types of costs in a business: how are they classified and what are they?

There are many types of costs in a business. Based on the criteria used, the economic activity analyzed and the type of level considered, we can talk about many different types of costs.

Whoever they are in any organization, they must be taken into account and know the types of costs that may arise within their institution, in order to anticipate them, to have them properly registered and, to the extent that they can, reduce costs and increase profits.

    Types of costs in a company according to the function they perform

    The types of costs in a business are very varied and its categorization depends on several aspects to be taken into account, in addition to the criterion used. Below, we’ll look at these criteria in addition to each of the categories that make them up.

    Depending on the function they perform, we can speak of costs of production, distribution or sale, administration and finance.

    Production costs

    Production costs they are those resulting from the process by which a raw material is transformed into an elaborate product. Within them we can find the following three subtypes:

    1. Raw material costs

    The raw material costs are those directly linked to the cost of materials incorporated into the productIn other words, what physically costs the product. For example, it would cost the wood that makes up a table, the malt of beer, or the clay of a piece of pottery.

    2. Cost of labor

    Labor costs are those derived from a direct intervention in the transformation of the material into a manufactured product.

    For example, this would be the cost of labor, the salary of the carpenter who made a table, the farmer who collected the malt, the miner who collected the clay.

    3. Indirect manufacturing costs

    Indirect manufacturing costs are expenses associated with production which occur during the transformation of the raw material into a product but which are not directly derived from the work. Among them we could find the salary of the supervisors of the craftsmen, maintenance, energy consumption, depreciation …

    There are many costs that can be given in a factory or in the production line which are indirect for the development of a product or the offering of a service which do not depend on the raw material nor on the hand of direct work.

    Distribution or selling costs

    The costs of distribution or sale are what they engage in the area that is responsible for transporting the finished products from the place of production to the consumer. They are also those that are related to the promotion and sale of the product or service, such as advertising, commissions, supply in the establishments where they are sold …

    Administrative costs

    Administration costs are those which, as their name suggests, result from the administrative activity of the company. They are directly linked to the direction and management of the general operations of the company, Among which we find salaries, telephone expenses, general offices, communication services within the organization …

    financial costs

    Financial costs are what they come from obtaining the external resources that the company needs for its development. These include the cost of interest that the business has to pay on loans, as well as the cost of providing credit to customers.

      Types of costs according to their identification with an activity, a department or a product

      In this classification we find direct costs and indirect costs.

      direct costs

      Direct costs are what they can be identified or quantified with finished products or specific areas. They are those that management can associate with specific services or elements. Among them we would also find the salary corresponding to the secretary of the sales manager, the cost of raw materials, the cost of labor …

      indirect costs

      Unlike direct costs, indirect costs are those that they cannot be fully identified or quantified with finished products or specific areas. An example of an indirect cost is the depreciation of machinery or the salary of a production manager against the product.

      Some costs are twofold, in that they are both direct and indirect. One case of this is the salary of the production manager which is direct for the costs of the production area but indirect for the product. Defining whether a cost is direct or indirect depends a lot on the activity analyzed.

      Depending on the time they were calculated

      In this criterion, we find the historical costs and the default costs.

      historical costs

      Historical costs, also known as actual costs, are those that are given after the product has been manufactured. These costs indicate how much it cost to produce a particular good or service. Historical costs are those used to prepare the external financial statements.

      default costs

      The default costs are those that they are calculated before or during the production of a particular item or service on an estimated basis or by applying the standard cost.

      1. Estimated costs

      We say that a cost is estimated when it is calculated on some empirical basis but remains approximate. That is to say that it is a forecasting or forecasting the value and amount of costs that will arise in producing the product or offering a service.

      2. Standard costs

      Standard costs are those that are established on a generally scientific basis for each of the cost elements of a particular item or service. is the calculation believed to be correct of what a product or service should cost in its production or offering, As long as there are no surprises and depending on how production has been so far.

      Depending on how long the revenue is invoiced

      Within this criterion we find the costs of the products and the period

      Product costs

      Product costs, as the name suggests, refer to those that occurred as a result of the production and sale of the product, regardless of the type of sale.

      Costs for the period

      Period costs are those that occur over a period of time. They can be daily, weekly, fortnightly and, at most, monthly. For example, the Company may occupy certain rental offices which cost is taken over a specific period (usually per month) and is independent of any products or services offered by the Company.

      Depending on the control you have over its occurrence

      Here we find controllable costs and uncontrollable costs.

      controllable costs

      Controllable costs are those that one or more people have the power to perform. For example, sales manager salaries are costs that can be controlled by their next higher level, the general sales manager. Another example is the secretary’s salary, which directly depends on what her boss decides.

      In reality, most of the costs of a business, especially wages, are controllable at one level or another of the organization. At lower levels this aspect is much less controllable, while at higher levels it is almost at its maximum. The manager of the whole organization can influence the salary of all his workers, while the lowest list is not even his.

      Controllable costs should not be considered as equal to direct costs. For example, the salary of a production manager is direct in relation to his field, but it is not controllable by him. These costs are those used to design the accounting areas of responsibility or any other administrative control system.

      Uncontrollable costs

      sometimes it has no authority over the costs that are processed. An example of this is the depreciation of equipment for the supervisor, as these expenses are usually a decision made by the landfill. management.

      According to their behavior

      In this criterion we find fixed costs, variable costs and mixed costs.

      fixed costs

      Fixed costs are those that they do not undergo any alteration over time, being constant although there are large fluctuations in terms of production or other aspects. Among the fixed costs, we have aspects such as the payment of the factory rent, the depreciation of the goods to be used in a straight line or by coefficients, the salary, the cost meter, the insurance, the wages, the wages of the security agents …

      It is generally these expenses necessary to maintain the structure of the company and which are carried out periodically. In the fixed costs we can find:

      1. Discretionary fixed fees

      Discretionary fixed costs they are the ones that are subject to change at any given time, as are the wages of workers, The rental of the building, the production process itself …

      2.fixed costs incurred

      Fixed costs incurred, also called submerged, are those that they are not modified by anything. An example of this would be the depreciation of machinery.

      variable costs

      The variable costs are those whose scope changes in direct relation to the volume of operations carried out within the company. This activity can be referred to as producing or selling. For example, spending on raw materials changes due to both changes in their value and in the amount required as production increases.

      mixed costs

      As the name suggests, blended costs have the characteristics of fixed and variable over several relevant ranges of operations.

      1. Semi-variable cost

      The fixed part of a semi-variable cost usually represents a minimum charge when manufacturing a particular product or offering a service. Its variable part is the cost invoiced for the actual use of the service..

      For example, most telephone service rates consist of two components: the fixed rate, which allows the user to receive or place calls, and the variable for each telephone call made.

      2. Tiered cost

      In escalating costs its fixed part changes suddenly at different activity levels, Since these costs are acquired in indivisible parts.

      This idea is a bit complex to understand, so let’s take an example. Imagine that a supervisor is required for 20 workers. If there were 30 workers we would need two supervisors and if we hired other workers up to 40 we would still only need two supervisors. But if we reach 41 workers, we will need three supervisors, because we need an additional one for every 20 workers.

      According to its importance for decision-making

      Here we find the relevant costs and the irrelevant costs.

      relevant costs

      Relevant costs are future expenses that they are expected to differ between alternative modes of action and may rule out whether to modify, reduce or eliminate any economic step or activity.

      irrelevant costs

      They are the ones who remain steadfast, no matter what course of action you choose.

      Depending on the type of sacrifice that was incurred

      In this criterion we find the disbursable and opportunity costs.

      reimbursable expenses

      Disbursable costs are those that involve an outflow of cash. These expenses will later become historical costs and may or may not become relevant when making administrative decisions.

      Opportunity cost

      When a new decision is made to apply a particular alternative, the advantages that other options would have entailed are foregone. The hypothetical benefits lost by rejecting other, perhaps better alternatives these are called opportunity costs for the chosen action.

      Depending on the change caused by an increase or decrease in activity

      In this criterion, we can find incremental costs and sunk costs.

      incremental costs

      Incremental costs refer to increases or decreases in total cost, or the change in any element of the cost produced by a change in the operation of the business. These costs are important when making a decision because they are the ones they show the changes, good or bad, that have been made to the business prior to a special order.

      1. Cost reduction

      When incremental costs are produced by reductions in the volume of the transaction, we speak of decremental costs.

      2. Incremental costs

      The incremental costs are what they are caused by the increase in activities or operations of the company.

      sunken costs

      The sunk costs are those that whatever action you choose, they will not be changed, i.e. they will remain immutable.

      According to its relation to the reduction of activities

      In this last criterion, we find the avoidable costs and the unavoidable costs.

      avoidable costs

      Avoidable costs are those that they are fully identifiable with a product or a department, so that in this way, if the product or the department is deleted, that cost is eliminated..

      inevitable costs

      Inevitable costs are those that are not eliminated, even if the department or product associated with them or suspiciously associated with them is removed from the business.

      Bibliographical references:

      • Barfield, J., Raibron, C. and Thomson, MK (2004). Traditions and innovations in cost accounting.
      • Polimeni, R., Fabozzi, F., and Adelberg, A. Cost accounting: concepts and applications for managerial decision making. Santafé from Bogotá. McGraw-Hill Inter-American.

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