What are the types of cost in cost accounting?


Cost accounting is the accounting process that measures and analyzes the costs associated with the production, manufacturing and projects, so that the correct amount reflected in the financial statements of the company. Cost accounting AIDS in the decision-making processes, which allows the company to calculate, assess and control their costs.

Below are some of the types of costs used in cost accounting:

Direct Costs

Direct costs associated with the production of goods or services. Direct cost includes materials, labour, expenses or distribution expenses associated with the production of the product. It can be easily traced to a product, Department or project. For example, the company “Ford motor” (f) produces cars and trucks. Factory worker spends eight hours creating the car. Direct costs associated with the car are the wage paid to the worker and parts used to build cars.

Indirect Costs

Indirect costs, on the other hand, are costs that are not associated with the production of goods or services. Indirect costs cannot be easily traced to a product, Department, activity or project. For example, Ford (F), the direct costs associated with each car are the tires and steel. However, electricity used to power the plant is an indirect cost because electricity is used for all products made at the plant. No product can be traced back to the electric account. Read more about direct and indirect costs, read how direct costs are distributed differently, indirect costs?

Fixed Costs

Fixed costs do not depend on the number of goods or services produced by the company. For example, if a company leases a machine for production for two years. The company must pay $2,000 per month to cover the rent. The rent is a fixed cost because it remains unchanged.

Variable Costs

Variable costs change as production levels change, in contrast to fixed cost. This type of cost varies depending on the number of products produced by the company. The increase in variable costs due to increased volume of production, and he falls, as reduced volume production. For example, the toy manufacturer needs to package their toys before sending the goods in the shops. It is considered a type of variable cost because as the manufacturer produces more toys, the packaging should increase. However, if the level of production the producer is reduced, the variable costs associated with reduced packaging. Read more about how fixed and variable costs affect the profit of the company, please read how fixed costs and variable costs affect gross profit?

Operating Costs

Operating expenses are expenses related to daily business activities, but does not rise to the same product. Operating expenses can be fixed or variable. Examples of operating expenses or more commonly called operating expenses include rent and utilities in a manufacturing enterprise. Operating expenses day to day expenses but do not meet the definition of cost of production. Investors can calculate the ratio of the operating expenses of the company, which shows how efficient the company is using their spending to stimulate sales.


Opportunity cost is the benefit given up when one decision after another. In other words, costs represent the alternative given up when a decision is made. This cost is, therefore, most important for two mutually exclusive events. In investing, it is the difference in return between a chosen investment and one that has passed. For companies, costs do not appear in the financial statements, but are useful in management planning process. For example, if a company decides to buy a new piece of technological equipment, not lease it. Costs will be determined by the difference between the cash cost of the equipment and increase productivity compared to how much money could be saved if the money was used for debt repayment.

Sunk Costs

Sunk costs are historical costs that are already incurred and does not affect the current management solution. Sunk costs are those costs, which the company intends and unavoidable or sunk costs. Irreversible costs (past costs) are excluded from future business decisions, because costs will be the same, regardless of the outcome of the decision.

Controllable Costs

Controllable costs are costs of managers to control and have the power to increase or decrease. For example, in deciding how products will be ordered or wages in manufacturing company will be controlled, but it is not always possible to avoid.

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