TYPES OF COSTS AND THEIR CHARACTERISTICS (WITH EXAMPLES) - DUDAS - 2024

The types of costs of a company refer to the different monetary values ​​that have all the factors that the company needs to develop its activity, and that are not its property. These are usually caused by a myriad of reasons: income, salaries, infrastructure, transportation, purchases of materials, among others.

For the organization to survive over time, these total costs must be equal to or less than the company's income. To facilitate its study, the logical thing is to divide the costs into different groups. In this way, there are different classifications of costs according to which variable is taken into account.

If we look at their nature, they are divided into raw material, labor, financial, distribution or tax costs. On the other hand, if we divide them according to their behavior, they are divided only into fixed costs and variable costs.

If we classify them according to the period of time, they are long-term and short-term costs. Finally, if we divide them according to their imputation to the products or services, they are classified as direct and indirect. Keep in mind that the classifications are independent of each other.

This implies that the different costs must fall into at least one category in each group. That is, a cost could be labor, fixed, long-term and direct.

Cost types

According to its nature

If we consider the cause or reason for these costs (that is, their nature) we can divide the costs into multiple types. The most common are the following:

Raw Materials

These costs refer to those related to the supply of the necessary material to produce the good or service that the company performs.

Labor

Here enter all the costs derived from the company's personnel, through their wages and salaries.

Financial

They are the costs derived from using possible capital resources that are not owned by the company.

Of distribution

They are all the costs derived from getting the product or service to the consumer.

Of tributes

In this group are the tax payments to the Treasury.

According to their behavior

The behavior of a cost refers to whether that cost is maintained over time by itself or if it depends on other factors to exist. In this group we find two types:

Fixed

They are the costs that, as the word says, are constant over a period of time, so their quantity does not change despite the changes in production or the factors used.

Variables

These costs are those that vary according to the productive level. Generally, the more production, the more variable costs.

According to your period of time

If we classify the costs taking into account the time during which they are maintained, they are divided into two large groups:

Long-term

They are the costs that are maintained for a period greater than one year.

Short term

Here enter the costs that are maintained for a period of less than one year.

According to the imputation to the products or services

Costs can also be differentiated according to how they relate to the product or service that the company produces.

While some are directly related, others are less so; however, they remain an essential part of the process. In this sense, we find two variants:

Direct

They are those that are directly related to the product or service; that is, they arise from the same good or service.

Indirect

When producing a good or service, there are a series of costs generated throughout the production process, without which the good could not have been produced. These are the indirect costs.

As we can see, there are many cost divisions. However, the concept will be much better understood by looking at an example of each of these.

Examples

Let's imagine a furniture manufacturing and distribution company. This company will incur a series of costs that it will have to overcome with the income it generates. The following examples are costs that this company has to bear:

According to its nature

Raw Materials

In this case, all the materials that the company needs to make its furniture fall into this group. Some examples could be wood, glass, or marble.

Labor

Here the costs of paying all workers in the company, such as operators, managers or directors, are taken into account.

Financial

If the company owns a machine that it does not own, the interest it generates is financial costs.

Of distribution

They are the costs associated with transporting the furniture to the clients; for example, gasoline from the truck.

Of tributes

The company will have to pay taxes, such as the Corporation Tax (IS) or the Personal Income Tax (IRPF).

According to their behavior

Fixed

In this case, fixed costs can be the rent of the premises or the monthly payment of the machine that is not owned by you. Also wages and salaries or financial costs are usually fixed.

Variables

Costs such as raw materials, distribution or some labor vary as the company's production changes. Therefore they fall into the category of variable costs.

According to your period of time

Long-term

Costs such as the aforementioned of the foreign machine can entail paying it for more than a year. In that case it is a long-term cost.

Short term

If the company buys wood from a supplier for a month, the chances are that, if it does not pay for it on the spot, it will have to do so in less than a year. In this case it would be a short-term cost.

According to the imputation to the products or services

Direct

The costs associated with the production of the furniture are direct costs; for example, the purchase of the wood necessary to produce them or the labor costs of the operators who make the furniture.

Indirect

There are other costs, such as energy or infrastructure, which are essential to be able to produce the furniture, despite not being directly related to it. These cases fall within the indirect costs.

References

1. O'Sullivan, Arthur; Sheffrin, Steven M. (2003). "Economics: Principles in Action". Upper Saddle River, New Jersey 07458: Pearson Prentice Hall.
2. Stephen Ison and Stuart Wall (2007). "Economics", 4th Edition, Harlow, England; New York: FT Prentice Hall.
3. Israel Kirzner (1979). "Perception, Opportunity and Profit", Chicago: University of Chicago Press.
4. Gónzalez Gómez, José Ignacio (2005). "The costs: concept and classification", Cost accounting and management. Oviedo.
5. Chen, Jing (2016). "The Unity of Science and Economics: A New Foundation of Economic Theory"