The goal of this paper is to help the HR Manager of a company understand current company budget decisions by having a clear understanding of the terms used to describe costs. This paper will discuss various terms used to describe costs such as fixed, variable, semi-variable, total, direct, indirect, sunk and historical. An example of each term will be given along with the description. At the conclusion of this paper the HR manager will have a clear understanding of the budget decisions being made by the company.
One of the most common terms heard in the business world is fixed cost. Fixed costs do not depend on the amount of sales or the current level of production of a company. A fixed cost does not vary it remains the same every month. “By installing modern, sophisticated equipment, you can virtually eliminate labor in the production of inventory. At high volume, you will do quite well, as most of your costs are fixed. At low volume, however, you could face difficulty in making your fixed payments for plant and equipment” (Block & Hirt, 2004, p. 114). The lease payments on the building that houses a company is a fixed cost, always costing a set amount each month or quarter.
Another common cost term is variable cost. Variable costs depending upon quantity produced or the amount of material used. An example of this would be a firm paying for its raw materials if they slow production less raw material is purchased lowering the variable cost. On the other hand if production speeds up more material must be purchased raising the variable costs. Combined fixed and variable costs make up total cost. Total cost is, simply put, the total economic cost of production.
A mixture of fixed and variable costs is termed semi-variable costs. These costs are fixed up to a certain amount and once that amount has been reached the costs become variable. The greater the level of production the higher a semi-variable cost.... [continues]
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