Different Types of Costs with Examples - From M to W?

(A) Actual Cost

Actual cost is defined as the cost or expenditure which a firm incurs for producing or acquiring a good or
service. The actual costs or expenditures are recorded in the books of accounts of a business unit. Actual
costs are also called as "Outlay Costs" or "Absolute Costs" or "Acquisition Costs".
Examples: Cost of raw materials, Wage Bill etc.
(B) Opportunity Cost
Opportunity cost is concerned with the cost of forgone opportunities/alternatives. In other words, it is the
return from the second best use of the firms resources which the firms forgoes in order to avail of the
return from the best use of the resources. It can also be said as the comparison between the policy that
was chosen and the policy that was rejected. The concept of opportunity cost focuses on the net revenue
that could be generated in the next best use of a scare input. Opportunity cost is also called as
"Alternative Cost".
If a firm owns a land, there is no cost of using the land (ie., the rent) in the firms account. But the firm
has an opportunity cost of using the land, which is equal to the rent forgone by not letting the land out on
rent.
(C) Sunk Cost
Sunk costs are those do not alter by varying the nature or level of business activity. Sunk costs are
generally not taken into consideration in decision - making as they do not vary with the changes in the
future. Sunk costs are a part of the outlay/actual costs. Sunk costs are also called as "Non-Avoidable
costs" or "Inescapable costs".
Examples: All the past costs are considered as sunk costs. The best example is amortization of past
expenses, like depreciation.
(D) Incremental Cost
Incremental costs are addition to costs resulting from a change in the nature of level of business activity.
As the costs can be avoided by not bringing any variation in the activity in the activity, they are also
called as "Avoidable Costs" or "Escapable Costs". More ever incremental costs resulting from a
contemplated change is the Future, they are also called as "Differential Costs"
Example: Change in distribution channels adding or deleting a product in the product line.
(E) Explicit Cost
Explicit costs are those expenses/expenditures that are actually paid by the firm. These costs are recorded
in the books of accounts. Explicit costs are important for calculating the profit and loss accounts and
guide in economic decision-making. Explicit costs are also called as "Paid out costs"
Example: Interest payment on borrowed funds, rent payment, wages, utility expenses etc.

(F) Implicit Cost

Implicit costs are a part of opportunity cost. They are the theoretical costs ie., they are not recognised by
the accounting system and are not recorded in the books of accounts but are very important in certain
decisions. They are also called as the earnings of those employed resources which belong to the owner
himself. Implicit costs are also called as "Imputed costs".
Examples: Rent on idle land, depreciation on dully depreciated property still in use, interest on equity
capital etc.
(G) Book Cost
Book costs are those business costs which don't involve any cash payments but a provision is made in the
books of accounts in order to include them in the profit and loss account and take tax advantages, like
provision for depreciation and for unpaid amount of the interest on the owners capital.
(H) Out Of Pocket Costs
Out of pocket costs are those costs are expenses which are current payments to the outsiders of the firm.
All the explicit costs fall into the category of out of pocket costs.
Examples: Rent Payed, wages, salaries, interest etc
(I) Accounting Costs
Accounting costs are the actual or outlay costs that point out the amount of expenditure that has already
been incurred on a particular process or on production as such accounting costs facilitate for managing
the taxation need and profitability of the firm.
Examples: All Sunk costs are accounting costs
(J) Economic Costs
Economic costs are related to future. They play a vital role in business decisions as the costs considered
in decision - making are usually future costs. They have the nature similar to that of incremental, imputed
explicit and opportunity costs.
(K) Direct Cost
Direct costs are those which have direct relationship with a unit of operation like manufacturing a
product, organizing a process or an activity etc. In other words, direct costs are those which are directly
and definitely identifiable. The nature of the direct costs are related with a particular product/process,
they vary with variations in them. Therefore all direct costs are variable in nature. It is also called as
"Traceable Costs"
Examples: In operating railway services, the costs of wagons, coaches and engines are direct costs.
(L) Indirect Costs
Indirect costs are those which cannot be easily and definitely identifiable in relation to a plant, a product,
a process or a department. Like the direct costs indirect costs, do not vary ie., they may or may not be
variable in nature. However, the nature of indirect costs depend upon the costing under consideration.
Indirect costs are both the fixed and the variable type as they may or may not vary as a result of the
proposed changes in the production process etc. Indirect costs are also called as Non-traceable costs.

Example: The cost of factory building, the track of a railway system etc., are fixed indirect costs and the
costs of machinery, labour etc.
(M) Controllable Costs
Controllable costs are those which can be controlled or regulated through observation by an executive and
therefore they can be used for assessing the efficiency of the executive. Most of the costs are
controllable.
Example: Inventory costs can be controlled at the shop level etc.
(N) Non Controllable Costs
The costs which cannot be subjected to administrative control and supervision are called non controllable
costs.
Example: Costs due obsolesce and depreciation, capital costs etc.
(O) Historical Costs and Replacement Costs.
Historical cost or original costs of an asset refers to the original price paid by the management to purchase
it in the past. Whereas replacement costs refers to the cost that a firm incurs to replace or acquire the
same asset now. The distinction between the historical cost and the replacement cost result from the
changes of prices over time. In conventional financial accounts, the value of an asset is shown at their
historical costs but in decision-making the firm needs to adjust them to reflect price level changes.
Example: If a firm acquires a machine for $20,000 in the year 1990 and the same machine costs $40,000
now. The amount $20,000 is the historical cost and the amount $40,000 is the replacement cost.
(P) Shutdown Costs
The costs which a firm incurs when it temporarily stops its operations are called shutdown costs. These
costs can be saved when the firm again start its operations. Shutdown costs include fixed costs,
maintenance cost, layoff expenses etc.
(Q) Abandonment Costs
Abandonment costs are those costs which are incurred for the complete removal of the fixed asset from
use. These may occur due to obsolesce or due to improvisation of the firm. Abandonment costs thus
involve problem of disposal of the asset.
(R) Urget Costs and Postponable Costs
Urgent costs are those costs which have to be incurred compulsorily by the management in order to
continue its operations. If urgent costs are not incurred in time the operational efficiency of the firm falls.
Example: Cost of material, labour, fuel etc
Postponable costs are those which if not incurred in time do not effect the operational efficiency of the
firm. Examples are maintenance costs.
(S) Business Cost and Full Cost

Business costs include all the expenses incurred by the firm to carry out business activities. Costs Include
all the payments and contractual obligations made by the firm together with the book cost of depreciation
on plant and equipment.
Full costs include business costs, opportunity costs, and normal profits. Opportunity costs is the expected
return/earnings from the next best use of the firms resources like capital, land and building, owners efforts
and time. Normal profits is necessary minimum earning in addition to the opportunity costs, which a firm
must receive to remain in its present occupation.
(T) Fixed Costs
Fixed costs are the costs that do not vary with the changes in output. In other words, fixed costs are those
which are fixed in volume though there are variations in the output level.. If the time period in volume
under consideration is long enough to make the adjustments in the capacity of the firm, the fixed costs
also vary.
Examples: Expenditures on depreciation costs of administrative, staff, rent, land and buildings, taxes etc.
(U) Variable Costs
Variable Costs are those that are directly dependent on the output ie., they vary with the variation in the
volume/level of output. Variable costs increase in output level but not necessarily in the same proportion.
The proportionality between the variable costs and output depends upon the utilization of fixed facilities
and resources during the production process.
Example: Cost of raw materials, expenditure on labour, running cost or maintenance costs of fixed assets
such as fuel, repairs, routine maintenance expenditure.
(V) Total Cost, Average Cost and Marginal Cost
Total cost (TC) refers to the money value of the total resources/inputs required for the production of
goods and services by the firm. In other words, it refers to the total outlays of money expenditure, both
explicit and implicit, on the resources used to produce a given level output. Total cost includes both fixed
and variable costs and is given by TC = VC + FC
Average Cost (AC) , refers to the cost per unit of output assuming that production of each unit incurs the
same cost. It is statistical in nature and is not an actual cost. It is obtained by dividing Total Cost(TC) by
Total Output(Q)
AC= TC/Q
Marginal costs(MC), refers to the additional costs that are incurred when there is an addition to the
existing output level of goods ans services. In other words, it is the addition to the Total Cost(TC) on
account of producing additional units.
(W) Short Run Cost and Long Run Cost
Both short run and long run costs are related to fixed and variable costs and are often used in economic
analysis.

Short Run Cost: These costs are which vary with the variation in the output with size of the firm as
same. Short run costs are same as variable costs. Broadly, short run costs are associated with variable
inputs in the utilization of fixed plant or other requirements.
Long Run Cost: These costs are which incurred on the fixed assets like land and building, plant and
machinery etc., Long run costs are same as fixed costs. Usually, long run costs are associated with
variations in size and kind of plant.

Variable costs change according to the quantity of goods produced; fixed costs are independent of the
quantity of goods being produced.

Total Cost
In economics, the total cost (TC) is the total economic cost of production. It consists of variable costs and
fixed costs. Total cost is the total opportunity cost of each factor of production as part of its fixed or
variable costs .

Calculating total cost

This graphs shows the relationship between fixed cost and variable cost. The sum of the two equal the
total cost.

Variable Costs
Variable cost (VC) changes according to the quantity of a good or service being produced. It includes
inputs like labor and raw materials. Variable costs are also the sum of marginal costs over all of the units
produced (referred to as normal costs). For example, in the case of a clothing manufacturer, the variable
costs would be the cost of the direct material (cloth) and the direct labor. The amount of materials and
labor that is needed for each shirt increases in direct proportion to the number of shirts produced. The cost
"varies" according to production.
Fixed Costs
Fixed costs (FC) are incurred independent of the quality of goods or services produced. They include
inputs (capital) that cannot be adjusted in the short term, such as buildings and machinery. Fixed costs
(also referred to as overhead costs) tend to be time related costs, including salaries or monthly rental fees.
An example of a fixed cost would be the cost of renting a warehouse for a specific lease period. However,

fixed costs are not permanent. They are only fixed in relation to the quantity of production for a certain
time period. In the long run, the cost of all inputs is variable.
Economic Cost
The economic cost of a decision that a firm makes depends on the cost of the alternative chosen and the
benefit that the best alternative would have provided if chosen. Economic cost is the sum of all the
variable and fixed costs (also called accounting cost) plus opportunity costs.

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KEY POINTS[ EDIT ]

Total cost is the sum of fixed and variable costs.
Variable costs change according to the quantity of a good or service being produced. The
amount of materials and labor that is needed for to make a good increases in direct proportion to the
number of goods produced. The cost "varies" according to production.
Fixed costs are independent of the quality of goods or services produced. Fixed costs
(also referred to as overhead costs) tend to be time related costs including salaries or monthly rental fees.
Fixed costs are only short term and do change over time. The long run is sufficient time
of all short-run inputs that are fixed to become variable.
TERMS[ EDIT ]
variable cost
A cost that changes with the change in volume of activity of an organization.

fixed cost
Business expenses that are not dependent on the level of goods or services produced by the business.

In production, research, retail, and accounting, a cost is the value of money that has been used up to
produce something, and hence is not available for use anymore. In business, the cost may be one of
acquisition, in which case the amount of money expended to acquire it is counted as cost.
"True cost" is the difference between the market price of a commodity and the comprehensive cost of
that commodity to society. The term is normally used to draw attention to missing or hidden costs that are
not found in the market price, even though it could theoretically apply to hidden benefits as well.
Economic cost is the gains and losses in money, time and resources of one course of action compared to
another. The comparison includes the gains and losses precluded by taking a course of action, as the those
of the course taken itself. Economic cost differs from accounting costbecause it includes
opportunity cost.
They include such expenses as rent, insurance, dues and subscriptions, equipment leases, payments on
loans, depreciation, management salaries, and advertising. Variable costs are those that respond directly
and proportionately to changes in activity level or volume, such as raw materials, hourly production
wages, sales