Cost Describtors

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Cost Descriptors

MBA 503 / Introduction to Finance and Accounting

Oct. 15, 2007

In the following paper the following accounting cost descriptors will be explained. They are fixed cost, variable cost, direct cost, indirect cost, sunk cost, and other cost that are associated with the listed cost.

Fixed costs are those cost that remain on the balance sheet or income statement because they are constant. For example: rent, property taxes, depreciation, and upper management salaries are considered fixed cost. Fixed Costs are those “costs that remain the relatively constant regardless of the volume of operations.” (Block,652). Fixed assets are also considered fixed costs. Fixed assets are those items that are owned by the company and that would not be considered for resale. Depreciation is “the allocation of the initial cost of an asset over its useful life. The annual expense of plant and equipment is matched against the revenues that are being produced.” (Block,649).

Variable cost are those cost that “move directly with a change in volume” (Block, 665). Items that fall under variable cost for example are raw materials, labor cost, and any sales commissions. Costs of goods sold are also considered a variable cost. Costs of goods sold are those items that have been sold during a specified time whether it’s monthly, quarterly, or yearly.

Direct cost are those costs that can be directly traced to the materials that are used to make a product and the cost associated with the cost unit. This cost is usually made up of materials costs, direct labor cost charged by the use of those items used to track labor or payroll, and direct expenses which could be invoices that are charged by subcontracters.

Indirect cost are those cost cannot be traced directly to a product. These cost that cannot