Types of Cost

Types of Cost

Introduction

In an organization there are several costs that are involved in the production or the operation of the firm. In order to cover each cost firms have developed classification of costs so that no cost is neglected and is not included in the calculation of total cost involved in producing a product. There are several activities that include different classification of cost. The most basic type of cost is the fixed cost, variable cost and mixed cost. These costs have different behaviors in relation to the type of the cost. Cost is the amount that is involved in the production and selling of the product. The amount of these cost incurred on the production and operation of a product or activity plays a vital role in the determination of the prices of the product and influences the pricing decisions of the firm. The report provide a detail classification of the types of cost, the effect of increase or decrease in sales volume on the costs and influence of costs while determining the price of the product.

Discussion

According to Hasen and Mowen (2010) the relative changes in the output due to the changes occurring in the cost of the product is termed as the cost behavior. Among the three different costs, fixed cost is one of the costs that do not change as the output changes. On the other hand is the variable cost that has a direct relation with the changes in output which means that an increase in variable cost lead towards an increase in output and a decrease in output will decrease the variable cost. The first step of any organization is to determine the cost of the product, for a manufacturing firm cost determination is easy because most of the costs are tangible cost but for a service providing organization cost determination is little difficult. In order to determine changes that will occur due to changes in the amount of cost and different activities in the business there are two general categories of drivers which are unit level drivers and the non-unit level driver. These drivers determine the factors that results in the change on different factors like revenues, cost, usage of the activity and the usage of the amount of cash. Unit level driver's changes provide an explanation for the change in cost as the change in production is occurring. Meanwhile the non-unit level driver change explains how the cost changes as compared to the unit level driver other than the changes occur in the production of the cost. In a cost management accounting system cost is determined under the cost behavior of the unit level driven but in an organization that depends on activity based accounting the cost is determined by using both the drivers that is unit level and non-unit level drivers.

The three main cost components that are used in an organization are fixed cost, variable cost and the mixed cost. Fixed cost is the cost that does not changes and ...