The 23 types of costs in a company: how are they classified and what are they?

An overview of the types of costs specific to a company, classified according to various criteria.

There are many different types of costs in a company.. Depending on the criteria used, the economic activity being analyzed and the type of level being considered, there are many different types of costs.

Whatever they are, in any organization it is necessary to take into account and to know the types of costs that can occur within its institution, in order to foresee them, to have them well registered and, as far as possible, to reduce costs and increase benefits.

Types of costs in a company according to the function in which they are incurred.

The types of costs in a company are very varied and its categorization depends on several aspects to be taken into account, in addition to the criterion to be used. Below we will look at these criteria as well as each of the categories within them.

According to the function in which they are incurred, we can speak of production, distribution or sales, administration and financial costs.

Production costs

Production costs are those derived from the process in which a raw material is transformed into a finished product.. Within them we can find the following three subtypes:

1. Raw material costs

Raw material costs are those directly related to the cost of the materials directly related to the cost of the materials integrated into the product, i.e., what is physicallythat is, the physical cost of the product. For example, it would be the cost of the wood that makes up a table, the malt in beer or the clay in a piece of pottery.

2. Labor costs

Labor costs are those costs derived from the direct derived from the direct intervention in the transformation of matter into a manufactured product..

For example, labor costs would be the wages of the carpenter who has made a table, the farmer who has harvested the malt, the miner who obtains the clay.

3. Indirect manufacturing overheads

Indirect manufacturing overheads are costs associated with production associated with production that occur during the transformation of raw materials into a product but do not derive directly from labor.. Among them we could find the salary of the craftsmen's supervisors, maintenance, energy consumption, depreciation....

There are many costs that can occur in a factory or in the production chain that are indirect for the production of a product or the provision of a service that do not depend on the direct raw material or labor.

Distribution or selling costs

Distribution or selling costs are those incurred in the area that incurred in the area that is responsible for bringing finished products from the production site to the consumer.. They are also those related to the promotion and sale of the product or service, such as advertising, commissions, supply in establishments where they are sold...

Administration costs

Administration costs are those which, as their name indicates, are originated by the administrative activity of the company. They are directly related to the direction and management of the general operations of the company, among which we can find the salaries and wages.Among them we can find salaries, telephone expenses, general offices, communication services within the organization...

Financial costs

Financial costs are those that are originated by the obtaining of external resources that the company needs for its development.. They include the cost of interest that the company must pay for loans, as well as the cost of granting credit to customers.

Types of costs according to their identification with an activity, department or product.

Within this classification we find direct costs and indirect costs.

Direct costs

Direct costs are those that can be identified or quantified with the finished products or specific areas.. They are those that management is able to associate with the given services or items. Among them we would also find the salary corresponding to the secretary of the sales manager, the cost of raw materials, the cost of labor ....

Indirect costs

Unlike direct costs, indirect costs are those that cannot be fully identified or quantified with finished products or specific areas. cannot be fully identified or quantified with the finished products or specific areas of production.. An example of an indirect cost is the depreciation of machinery or the salary of the production manager with respect to the product.

Some costs are dual, in the sense that they are both direct and indirect. A case in point is the production manager's salary which is direct to the production area costs, but indirect to the product. Defining whether a cost is direct or indirect depends very much on the activity being analyzed.

According to the time in which they were calculated

Within this criterion we find historical costs and predetermined costs.

Historical costs

Historical costs, also referred to as actual costs, are those that occur after the product has been occur after the product has been manufactured.. This type of cost indicates what it has cost to produce a particular good or service. Historical costs are those used in the preparation of external financial statements.

Predetermined costs

Predetermined costs are those that are are calculated before or during the production of a given item or service on an estimated basis or by applying the standard cost..

Estimated costs

We say that a cost is estimated when it is calculated on certain empirical bases but is still approximate. That is, it is a forecast or prognosis of the value and quantity of the costs that will be incurred during the production of the product or the provision of a service..

2. Standard costs

Standard costs are those that are made on a generally scientific basis on each of the cost elements of a given item or service. It is the calculation believed to be accurate of what a product or service should cost to produce or offer, provided there are no surprises and based on how production has been up to that point.The cost of a product or service, as long as there are no surprises and based on how the production has been up to that moment.

According to the time in which they are charged to income.

Within this criterion we find product and period costs.

Product costs

Product costs, as the name suggests, refer to those costs that have arisen as a result of production up to that point in time. have arisen as a consequence of the production and sale of the product, regardless of the type of sale..

Period costs

Period costs are those that occur during a certain period of time. They can be daily, weekly, fortnightly and, at most, monthly.. For example, the company may be occupying rented office space, the cost of which is incurred over a specific period (usually a month) and which is independent of how many products or services the company offers.

Depending on the control over their occurrence

Here we find controllable costs and non-controllable costs.

Controllable costs

Controllable costs are those that one or more persons have the authority to carry out.. For example, the salaries of sales managers are controllable costs by their immediate superior, the general sales manager. Another example is the salary of the secretary who depends directly on what her boss decides.

In reality, most of the costs of a company, especially salaries, are controllable at one or another level of the organization. At lower levels this aspect is much less controllable, while at higher levels it is almost to the maximum. The manager of the entire organization can influence the salaries of all his employees, while the lowest echelon cannot even influence his own.

Controllable costs should not be thought of as equal to direct costs.. For example, the salary of a production manager is direct with respect to his area, but it is not controllable by him. These costs are the ones used to design the accounting by areas of responsibility or any other administrative control system.

Non-controllable costs

In some cases you do not have authority over the costs you manage. An example of this is the depreciation of equipment for the supervisor, since such an expense is usually a decision made by top management.

According to their behavior

In this criterion we find fixed costs, variable costs, and mixed costs.

Fixed costs

Fixed costs are those that do not undergo any alteration over time, being constant even when there are large fluctuations in even when there are large fluctuations in terms of production or other aspects. Among the fixed costs we have aspects such as the payment of the factory rent, the depreciation of assets of use in straight line or by coefficients, the salary of the cost accountant, insurances, salaries, the salary of the security guards...

They are usually those expenses necessary to sustain the structure of the company and which are incurred periodically. Within the fixed costs we can find:

1. Discretionary fixed costs.

Discretionary fixed costs are those susceptible to be modified at some time, such as the salaries of the workers, the rent of the building, the own building and the cost of the building.The rent of the building, the production process itself...

2. committed fixed costs

Committed fixed costs, also known as submerged costs, are those that are not modified by anything. An example of this would be the depreciation of machinery.

Variable costs

Variable costs are those whose magnitude changes in direct proportion to the volume of operations carried out within the company.. Such activity may be related to production or sales. For example, expenditure on raw materials changes both because of variations in their value and in the quantity required as production increases.

Mixed costs

As the name suggests, mixed costs have the characteristics of both fixed and variable costs over various relevant ranges of operations.

Semi-variable cost

The fixed part of a semi-variable cost usually represents a minimum charge when making a certain product or offering a service. Its variable part is the cost charged for actually using the service..

For example, most telephone service charges consist of two elements: the fixed charge, which allows the user to receive or make calls, and the variable charge for each telephone call made.

2. Tiered cost

In tiered costing its fixed portion changes abruptly at different activity levelsThe fixed part changes abruptly at different levels of activity, since these costs are acquired in indivisible parts.

This idea is somewhat complex to understand so let's look at an example. Let's imagine that one supervisor is required for every 20 workers. If there were 30 workers we would need two supervisors and, if we hire other workers up to 40 we would still only need two supervisors. But if we reach 41 workers we will require three supervisors, since we need one extra supervisor for every 20 workers.

According to their importance for decision making

Here we find relevant costs and irrelevant costs.

Relevant costs

Relevant costs are those future expenditures that are expected to differ are expected to differ between alternative courses of action and can be discarded if some economic step or activity is changed, reduced or eliminated..

Irrelevant costs

Irrelevant costs are those that remain unchanged, regardless of the course of action chosen.

According to the type of sacrifice incurred.

In this criterion we find disbursable and opportunity costs.

Disbursable costs

Disbursable costs are those that involve the outflow of cash. These expenses will later become historical costs and may or may not be relevant to management decisions.

Opportunity cost

When a new decision is made to implement a certain alternative, the benefits that would have been derived from other options are foregone. The hypothetical benefits lost by discarding other, perhaps better, alternatives, are what are called opportunity costs for the chosen action..

According to the change caused by an increase or decrease in activity.

In this criterion we can find differential costs and sunk costs.

Differential costs

Differential costs refer to increases or decreases in total cost, or the change in any cost element produced by a variation in the company's operation. These costs are important during decision making, since they are the ones that show the changes, beneficial or negative, that have occurred in the company in response to a special order..

1. Decreasing costs

When the differential costs are produced by reductions in the volume of the operation, we speak of decremental costs.

2. Incremental costs

Incremental costs are those that are caused by an increase in the company's activities or operations..

Submerged costs

Submerged costs are those that, regardless of the action chosen, will not be altered, i.e., they will remain unchanged. regardless of the action chosen, will not be altered, i.e. they will remain unchanged..

According to their relation to the reduction of activities

In this last criterion we find avoidable costs and unavoidable costs.

Avoidable costs

Avoidable costs are those that are fully identifiable with a product or department, so that if the product or department is eliminated, the cost is eliminated..

Unavoidable costs

Unavoidable costs are those that are not eliminated, even if the department or product associated with them or suspiciously associated with it is eliminated from the company.

Bibliographical references:

• Barfield, J., Raibron, C. and Thomson, M. K. (2004). Cost Accounting Traditions and Innovations.
• Polimeni, R., Fabozzi, F., and Adelberg, A. Cost accounting: concepts and applications for managerial decision making. Santafé de Bogotá. McGraw-Hill Interamericana.