Cost Concept
What is a cost concept? What are different types of costs in accounting? What are different types of costs for businesses?
Standard cost concepts – or types of cost – are total cost, fixed cost, variable cost and marginal cost.
Simply stated, total cost (TC) is how much money is required to operate at some particular output level. Total cost equals fixed cost plus variable costs (TC = FC + VC).
Fixed cost is the part of cost of production that is fixed – it is the same no matter how many units you are producing. For instance, rent and interest on loans are usually fixed.
Variable cost is the part of production that varies depending on the level of production – it changes as a result of production. For instance, material costs are a classic variable cost because as you produce more units you require more material inputs.
In practice cost concepts are far more complex. A standard list of elements of costs include: direct material, direct labor, direct expenses, factory overhead, selling and distribution overhead, indirect material, indirect labor, indirect expenses.