Types of Costs in Accounting

Direct costs are those costs that cann be directlyover a relatively broad range of sales volume or
attributed to a product or product line, or to oneproduction output. They're like an albatross around
source of sales revenue, or one business unit orthe neck of business and a company must sell its
operation of the business. An example of a directproduct at a high enough profit to at least break
cost would be the cost of tires on a neweven.
automobile.Variable costs can increase and decrease in
Indirect costs are very different and can't beproportion to changes in sales or production level.
attached to any specific product, unit or activity.Variable costs vary proportionately with changes
The cost of labor or benefits for an autoin production/
manufacturer is certainly a cost, but it can't beRelevant costs are essentially future costs that
attached to any one vehicle. Each business has tocould be incurred, depending on what strategic
devise a method of allocating indirect costs tocourse a business takes. If an auto manufacturer
different products, sources of sales revenue,decides to increase production, but the cost of
business units, etc. Most allocation methods aretires goes up, than that cost needs to be taken
less than perfect, and generally end up beinginto consideration.
arbitrary to one degree or another. BusinessIrrelevant costs are those that should be
managers and accounts should always keep andisregarded when deciding on a future course of
eye on the allocation methods used for indirectaction. They're costs that could cause you to
costs and take the cost figures produced bymake a wrong decision. Whereas relevant costs
these methods with a grain of salt.are future costs, irrelevant costs are those costs
Fixed costs are those costs that stay the samethat were incurred in the past. The money's gone.