Cost Descriptions Paper
University of Phoenix
The HR manager in my organization is struggling to understand current budget discussions. In an attempt to clarify, I have been asked to create a memo describing various terms used to describe costs and provide examples. This paper will identify, describe, and provide examples for those various terms such as fixed, variable, indirect, direct and sunk costs. Investorwords.com is an extensive dictionary of financial terms that I will use to provide definitions for the various terms discussed in this paper followed by examples of each.
Every business has fixed costs. These costs normally remain and do not vary month-to-month. A few examples of fixed costs are rent, insurance, property taxes, leased equipment etc. Fixed costs, however, are fixed for a certain period of time. Eventually, fixed costs become variable (allbusiness.com) because leases costs may increase or taxes may decrease over time, for example.
Variable costs are costs that change according to the change in the volume of production units (investorwords.com). For example, labor, material or overhead are variable costs because they change depending on the work load. Variable costs and fixed costs make up the total sales costs for a company.
Indirect costs are costs not directly related to the manufacturing of a product or completion of a project. For example, salaries of accounting and purchasing personnel are included in indirect costs as well as administrative expenses and facilities management. Also, indirect costs can be those items not readily identifiable but necessary to the general operation of an organization (www.nsf.gov).
However, direct costs are the opposite of indirect costs and are directly related to the manufacturing of a product. For example, equipment purchased to accommodate a particular function in creating a product is a direct cost; however, leasing the equipment... [continues]
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