Types of Costs and Their Characteristics (With Examples)

The types of costs of a company refer to the different monetary values ​​that have all the factors that the company needs to develop their activity, and that are not their property. These are usually originated by an infinity of reasons: rents, salaries, infrastructures, transport, purchases of materials, among others.

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

Types of costs

If we look at their nature, they are divided into costs of raw materials, labor, financial, distribution or taxes. On the other hand, if we divide them according to their behavior, they are divided only in 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 enter at least one category of each group. That is, a cost could be labor, fixed, long-term and direct.

Index

  • 1 Types of costs
    • 1.1 According to its nature
    • 1.2 According to your behavior
    • 1.3 According to your period of time
    • 1.4 According to the imputation to the products or services
  • 2 Examples
    • 2.1 According to its nature
    • 2.2 According to your behavior
    • 2.3 According to your period of time
    • 2.4 Long-term
    • 2.5 According to the imputation to the products or services
  • 3 References

Types of costs

According to its nature

If we take into account 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 carries out.

Labor

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

Financial

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

Of distribution

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

Of tributes

In this group are tax payments to the Treasury.

According to your behavior

The behavior of a cost refers to whether that cost is maintained in time alone 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 that their amount does not change despite the change in production or the factors used.

Variables

These costs are those that vary according to the level of production. 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 their relationship with the product or service produced by the company. While some are directly related, others are not so related; 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 during the entire 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 seeing 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 assume:

According to its nature

Raw Materials

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

Labor

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

Financial

If the company owns a machine that is not its property, the interests it generates are financial costs.

Of distribution

Are the costs associated with transporting the furniture to the client; for example, the gasoline of 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 your behavior

Fixed

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

Variables

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

According to your period of time

Long-term

Costs such as the mentioned one from the foreign machine may entail paying it for more than a year. In that case it is a long-term cost.

Short term

If the company purchases wood from a supplier one month, it is likely that, if it does not pay for it at the time, it must do so within a period of less than one 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 workers who manufacture 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"