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Cost Descriptors Paper

By:   •  Research Paper  •  837 Words  •  April 1, 2010  •  881 Views

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Cost Descriptors Paper

Introduction

It is imperative for the Human Resource Manager of any firm to have an understanding of the company budget and how it is affected by certain costs. It has been brought to my attention that the HR manager of my company lack knowledge in that area, particularly concerning the meaning of certain cost descriptors. The terms, which will be included in this report, include fixed, variable, direct, indirect, sunk, marginal and total costs. This report will serve the purpose of giving the HR manager the knowledge and understanding necessary to run a business.

Fixed Cost

Fixed costs are costs, which do not vary or change depending on or according to sales and/or production levels in a firm (Block & Hirt, 2005). Examples of fixed costs include insurance, property tax, rent or interest expenses. A business owner or retailer has to pay utilities and rent no matter how much money they make in sales. The rent and utilities are fixed costs because they do not change whether the retailer has much or little profit or losses. Fixed costs remain almost constant. They change very little, if at all, over a period of time.

Variable Costs

Variable costs, to the contrary of fixed costs, are expenses that experience changes depending on a firm’s activity (Block & Hirt, 2005). Examples of variable costs include the cost of materials, labor and other overhead costs, which change according to the volume of production. Fixed costs and variable costs combined comprise the total cost of production in a firm. Variable costs change as production increases. Fixed costs, however, stay the same.

Direct Cost

Direct costs are costs, which are attributed directly to providing services or manufacturing products (allbusiness.com). Consider, for example, the production of fast food at McDonald’s restaurant. The direct cost of producing a McChicken sandwich would be the cost of the chicken patties, lettuce and bread. Therefore, for the production of the McChicken to be a success, the restaurant will need to supply enough chicken, lettuce and bread.

Indirect Cost

Indirect costs are the opposite of direct costs. They are not directly attributed to the production of services and goods. They are, however, a major necessity in the overall production of a firm. Indirect costs are costs which are “difficult to trace directly to a specific costing object,” (allbusiness.com). An example of an indirect cost would be the maintenance of a building, which would not be attributed to any particular budget. On a specific project, the indirect costs might be the maintenance and overhead costs associated with the job. They would not be directly linked to any product or service.

Sunk Cost

Sunk costs are costs “incurred in the past whose total will not be affected by any decision made now or in the future. Sunk costs are usually past or historical costs,” (allbusiness.com). They generally can not be recovered. A good example of sunk costs is when an employee goes on a business trip and purchases an airline ticket and conference registration fees. Both of these costs are non-refundable. They become sunk costs. If the employee decides not to go on the trip, there is no way to recover the money

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