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

There are many different types of costs in a company. Based on the criteria that is used, the economic activity that is analyzed and the type of level that is being taken into account, we can talk about many different types of costs.

Whatever they may be, in any organization, the types of costs that may occur within their organization must be taken into account and known. institution, in order to anticipate them, have them well registered and, to the extent possible, reduce costs and increase benefits.

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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 criteria used. Next we will see these criteria in addition to each of the categories within them.

According to the function in which they are incurred, we can talk about production, distribution or sale, 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 materials integrated into the product, that is, what the product physically costs. For example, it would be the cost of the wood that makes up a table, the malt for beer, or the clay for a piece of pottery.

2. Labor costs

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

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

3. manufacturing overhead

Manufacturing overhead costs are expenses associated with production that occur during the transformation of the raw material into a product but are not directly derived from labor. Among them we could find the salary of the artisan 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 elaboration of a product or the offer of a service that does not depend on raw materials or labor direct.

Distribution or sale costs

The costs of distribution or sale are those that incurred in the area that is responsible for taking the finished products from the place of production to the consumer. They are also those that are 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 that, as the name suggests, originate from 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 salaries, telephone costs, general offices, communication services within the organization...

financial costs

The financial costs are those originate from obtaining external resources that the company needs for its development. They include the cost of interest that the company must pay on the loans, as well as the cost of granting credit to customers.

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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 can be identified or quantified with 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 director, the cost of raw material, 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. An example of indirect cost is the depreciation of the machinery or the salary of the production manager with respect to the product.

Some costs are dual, in the sense that they are direct and indirect at the same time. An example of this is the production manager's salary, which is direct for the costs of the production area, but indirect for the product. Defining whether a cost is direct or indirect depends a lot 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 known as actual costs, are those that occur after the product has been manufactured. These types of costs indicate what it has cost to produce a certain good or service. Historical costs are those used when preparing the external financial statements.

default costs

Default costs are those that They are calculated before or during the production of a certain article or service in estimated form or by applying the standard cost.

1. estimated costs

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

2. standard costs

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

According to the time in which they are charged to income

Within this criterion we find the costs of the products and the period

Product costs

The costs of the product, as its own name indicates, refers to those that have occurred 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, it may be that the company is occupying rental offices whose cost is carried in a specific period (usually a month) and that is independent of how many products or services the company offers. company.

Depending on the control you have over its occurrence

Here we find controllable costs and uncontrollable costs.

controllable costs

controllable costs are those that one or more people have the authority to carry out. For example, the salaries of sales managers are costs that can be controlled by their level immediately above them, the general sales manager. Another example is the secretary's salary, which depends directly on what the boss decides.

Actually, 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 maxed out. The director of the entire organization can influence the salary of all his workers, while the lowest echelon is not even 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 used to design accounting by areas of responsibility or any other administrative control system.

Uncontrollable costs

Sometimes there is no authority over the costs that are handled. An example of this is the depreciation of equipment for the supervisor, since such an expense is usually a decision made by upper management.

according to their behavior

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

Fixed costs

Fixed costs are those that They do not undergo any alteration with the passage of time, being constant 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 rent of the factory, the depreciation of fixed assets in straight line or by coefficients, the salary of the cost accountant, insurance, salaries, the salary of security guards security…

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

1. Discretionary fixed costs

Discretionary Fixed Costs are those susceptible to be modified at some point, such as the salaries of workers, the rental of the building, the production process itself...

2. committed fixed costs

Committed fixed costs, also known as sunk costs, are those that they 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. Said activity can be referred to production or sales. For example, spending on raw materials changes both because of variations in their value and in the amount required as production increases.

mixed costs

As its own name suggests, mixed costs have the characteristics of fixed and variable costs throughout various relevant ranges of operations.

1. semi-variable cost

The fixed part of a semivariable cost usually represents a minimal charge to make a certain product or offer a service. Its variable part is the cost charged for actually using the service..

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

2. tiered cost

At scaled cost its 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 see 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 need only two supervisors. But if we reach 41 workers, we will require three supervisors, since we need an extra one for every 20 workers.

According to its importance for decision making

Here we find relevant costs and irrelevant costs.

relevant costs

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

irrelevant costs

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

According to the type of sacrifice that has been incurred

In this criterion we find out-of-pocket and opportunity costs.

out-of-pocket costs

Out-of-pocket costs are those that involve cash outflow. These expenses will later become historical costs and may or may not become relevant when making management decisions.

Opportunity cost

When a new decision is made to apply a certain alternative, the benefits that other options would have brought are abandoned. The hypothetical benefits lost by discarding other alternatives, perhaps better ones, are what are called opportunity costs for the chosen action.

Depending on 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 the total cost, or the change in any element of the cost produced by a variation in the operation of the company. These costs are important during decision making, since they are the ones that show the changes, beneficial or negative, that have taken place in the company due to a special request.

1. decreasing costs

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

2. incremental costs

Incremental costs are those are caused by the increase in the activities or operations of the company.

sunk costs

Sunk costs are those that regardless of the action chosen, they will not be altered, that is, they will remain unchanged.

According to its relation to the reduction of activities

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

avoidable costs

Avoidable costs are those that they are fully identifiable with a product or department so, in this way, if the product or department is eliminated, that 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.

Bibliographic references:

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