Cost Discriptors Paper

Running head: Cost Descriptors Paper

Cost Descriptors Paper

University of Phoenix

Executive Summary

The Human Resources Department has been struggling to understand current budget discussions the following are some various terms used to describe costs (fixed, variable, direct, indirect, sunk, etc.), including examples of each. Fixed costs are the costs that do not vary with the number of goods produced. Variable costs are expenses that change in direct proportion to the activity of a business. Actual costs refer to real transactions, whereas opportunity costs refer to the alternative taken into consideration by decision makers who might want to choose the line of activity which minimize the costs. Sunk costs are investment costs incurred before a certain activity takes place which cannot be recovered by the possible sale of the asset they produced and represent barriers to exit. Direct costs are identified specifically with a particular supported venture and can be directly allocated to such actions, comparatively easily and with a high degree of precision. The costs terms described in the cost descriptors paper are viable information that should allow the HR manager understand current budget discussions.

Introduction

“Just” People Inc.

Memo

To: HR Manager

From: Anthony Smith

CC: Executive Director

Date: March 11, 2007

Re: Various terms used to describe costs

The Human Resources Department has been struggling to understand current budget discussions the following are some various terms used to describe costs (fixed, variable, direct, indirect, sunk, etc.), including examples of each.

Fixed Costs

(Clark2006) In production, fixed costs are the costs that do not vary with the number of goods produced. In the short-run factors like land and rent are fixed costs, whereas raw materials used in production are not. An example is the expenses of the goods used by a firm on the idea that these reflect a long-term commitment that can be recovered only by wearing them out in the production of goods and services for sale.

Variable costs

(USC 2001) Variable costs are expenses that change in direct proportion to the activity of a business. Along with fixed costs, variable costs make up the two components of total cost. Direct Costs; however, are costs that can be associated with a particular cost object. Not all variable costs are direct costs however; for example, variable manufacturing overhead costs are variable costs that are not a direct costs, but indirect costs. For example, a computer firm pays for raw materials. When movement is decreased, fewer raw materials are used so the expenditure for raw materials falls. When action is greater than before, additional raw materials are used and expenditure therefore rises.

Actual and Opportunity Costs

(Piana 2003)Actual costs refer to real transactions, whereas opportunity costs refer to the alternative taken into consideration by decision makers who might want to choose the line of activity which minimize the costs. For example, this firm pays actual salaries to employees, the employees are accounted for and payment is definite and cost is actual. The firm has the opportunity to reduce those costs by firing HR managers that are unproductive thus the opportunities to save and minimize costs are available.

Sunk Costs

(Arkes 1999) Sunk costs are investment costs incurred before a certain activity takes place which cannot be