Cost Descriptors

Cost Descriptors

The successful recognition of a company is not only its innovation, continuing technology development, increase of market share and globalization but also by managing and controlling its products’ costs completely in order to gain more profitability. Cost is one of the main important factors to contribute to the company’s viability and growth. The term “cost” is in very broad meaning that refers to all purchases made by a business whether in cash or on credit. The recent consumer reports have shown that the market is not stable and has become harder for forecasting. Since the market is up and down unpredictably, the attempt to maintain lower prices is a challenge for the human resource Managers and executive leadership. It is critical for the HR managers of any company to understanding the important of the company’s budget in order to make right decisions and forecast projections. This paper will explore different terminologies and breakdown what each means as well as giving specific examples of each term. This report will help the HR Department to become more efficient for the organization. These terms will include fixed, variable, direct and indirect, sunk, marginal, and total cost with the purpose of giving the HR managers the knowledge and understanding to run a business.

Fixed Cost

Fixed cost is the cost that does not vary or change in respect to production sizes or sale levels. Fixed cost is defined as the costs associated with a product that are fixed over a number of units and remain the same even during the hot-sales or busy periods, regardless of the number of units produced or sold. Examples of fixed costs are facility rentals, machines and equipments installations and maintenance, property tax, insurance, or interest expenses (Block and Hirt, 2005). For example, the depreciation on an ethanol facility is the same regardless of whether the facility operates at 75% or 100% of capacity. In other words, fixed costs are the total fixed amount that a company must expense no matter how many products or services offering or selling to the market (National Council on Economic Education, 2008).

Variable cost

Variable cost is the cost that changes in respect to production sizes or sale levels. Most of the costs incurred by a business are variable cost because they vary with the amount of production. Examples of variable costs are materials, parts and components, utilities, electric power to operate machines, office supplies, or labors (Block & Hirt, 2005). For example, the increase of raw material due to production’s operation as more units of a product needs to build or make (National Council on Economic Education, 2008). Variable cost is computed as follows:

Variable cost = total cost – minus fixed cost

Direct cost

Direct cost is the cost that attributes directly to provide services, specific products or projects (Investopedia, 2008). In other words, direct costs are “those costs that can be identified specifically with a particular sponsored project, an instructional activity, or any other institutional activity, or that can be directly assigned to such activities relatively easily with a high degree of accuracy” (Virginia Commonwealth University, 2008). Examples of this cost include travel expenses, subcontracts, repairs, or budget for a specific activity or project. For example, the cost of meat in a McDonald’s hamburger is a direct attribution to the cost of manufacturing. The direct cost of making a McChicken sandwich would be the cost of the chicken patties, lettuce, and bread.

Indirect Cost

Indirect cost is the cost that does not attribute directly to provide services, specific products, or projects but they are necessary for the general operations of the company (Investopedia, 2008). In other words, indirect costs also include general institutional costs that occur for common and join objective such as capital improvements, sponsored programs administration, benefits, or contract services (University of Alaska Anchorage, 2008). Examples of indirect costs are administrative expenses, indirect salaries, employee fringe benefits (vacation, holiday, sick leave, health insurance) and those related to facilities (facility rental, plant depreciation, building maintenance), utilities, indirect supplies, and fees (legal, accounting).

Sunk Cost

Sunk cost is the cost referred to company’s non-refundable or non-recoverable fixed costs in present or future events. Most of the digital products usually have significant sunk cost in comparing to the other products in the form of technology and development. If the products