Report on Types of Costs

Introduction of Types of Costs

The goal of this paper is to discuss different types of costs incurred in various organizations. The costs which this paper will discuss in detail include controllable and uncontrollable costs, opportunity cost, out of pocket costs, and sunk costs. Along with discussing all the costs the paper will shed light on the role of budget in the decision-making process of the business. Through this paper not only the detail of the costs can be understood but also the significance of the budget in the business can be understood. For the financial analysts the knowledge of different types of costs is essential so that it can allocate the costs accurately (Management, 2013).

Controllable costs of Types of Costs

The controllable cost can be described as the costs which can be controlled or influenced by the decision taken by the management of any organization.  The head who is responsible for the costs can control these cost-effectively. The following are the costs which can be controlled:

·         Incremental Cost

·         Stepped Fixed Cost

·         Variable cost

The variable costs are such costs that change with the changes in output. For instance, if the number of units of production increases, the cost associated with it also increases as a result.  The costs which come under variable cost include direct labor, direct material and factory overhead.

The incremental costs can be explained as the additional cost which occurs when the manager makes any changes in the decision. The stepped fixed cost can also be controlled by the managers (Warren, Reeve, & Duchac, 2016). The stepped fixed cost can be described as the cost which does not show any change however it stepped cost changes when the production activity enhances beyond specific limit.  The top management and the middle-level management of the organization is responsible for making decisions in the organization. Therefore, they are the ones who can control the costs, which are explained above (Weygandt, Kimmel, & Kieso, 2009).

Uncontrollable costs of Types of Costs

The uncountable cost can be described as the costs which cannot be controlled by the management of the organization. The decisions of the managers cannot control these costs. These costs are usually enforced by the top-level managers in any organization (Brett Q Ford.Sandy J. Lwi, 2018). The costs which cannot be controlled by the management are mentioned as follows:

·         Regulated Costs

·         Fixed Costs

The fixed costs can be described as the costs which do not show change with the change in the output of the organization. In other words fixed costs do not experience any change when unit produced changes. The fixed costs in any business include indirect labor, indirect material, insurance, depreciation, rent, utility expense, repair & maintenance (Crosson & Needles, 2010).

Apart from these costs there are some other costs as well which cannot be controlled by the manager, which are referred to as regulated costs. The regulated costs include government levies, tax expense interest expense and costs associated with regulatory standards are all those costs which cannot be influenced by the managers. In controllable cost the decision making authority is top management, but in uncontrollable cost the lower level management is responsible for handling these costs. The uncontrollable costs require long-time period for alteration instead of short time period.

Opportunity Cost of Types of Costs

The opportunity cost can be explained as the benefit which the organization or any business has lost because it has selected another alternative. The financial statements do not include opportunity costs however it is still considered important in the decision-making process. The managers can use the opportunity cost for making rational decisions (Myer:, 2013). The formula for calculating the opportunity cost is mentioned as follows:

The opportunity costs are further divided into two categories, which include explicit cost and implicit cost. The explicit cost can be explained as the cost which occurs in the organization as result of the decision which is taken by the management. On the other hand the implicit cost cannot be shown through cash flow. The implicit cost occurs as result of how the organization is allocating its assets. The opportunity cost has huge significance in the decision-making process because, with the help of opportunity cost the management can evaluate which alternative will provide benefit to the organization. If the organization is not going to evaluate the opportunity cost than the management might unable to make profitable decisions which can result in huge financial loss (Warren, Reeve, & Duchac, 2016).

Out of Pocket Cost

The out of pocket costs are those costs which the person pays from its own pocket. These expenses which the person has paid from its own reserve are later reimbursed by the organization. The out of pocket expenses can be understood from the example of health insurance (Davis & Davis, 2010). The amount paid for coinsurance, deductibles and copays in health insurance is out of pocket expenses.  Many employees in the organization pay for the business expenses from their own pocket, but the employer of the organization reimbursed them according to the policy of the corporation. In the organization the expenses which can be referred to as out pocket expenses are:

·         Gas expense

·         Parking expense

·         Tolls

·         Car rent

·         Lodging (Davis & Davis, 2010).

Sunk Cost of Types of Costs

The costs which are incurred in the organization and are no longer recoverable by the corporation are known as a sunk cost. When the organization is considering to invest in the project the sunk cost does not become part of the decision making process. In the decision-making process only those costs are incurred which they think are relevant to the project. The costs which are considered as sunk costs are mentioned as follows:

·         R&D Cost

·         Training Cost

·         Marketing Research

The research and development related expenses are considered as a sunk cost. For instance the organization has spent $100,000 on the development of a product. After the product is developed it unable to grab the market share. So the amount of $100,000 will be considered as sunk cost because it will not be considered in any decision. Another example of sunk cost is the training cost. For instance the organization has provided training to its staff members to sale a specific product. But later on organization decided to discontinue this product because it does not have many customers. The training cost in this scenario will become the sunk cost (Davis & Davis, 2010).

Role of Budget in Decision Making of Types of Costs

It is essential for the corporation to create a budget so that the corporation can utilize its resources efficiently. The budget provides a brief overview of how much cost will incurred in performing the business activities. If the corporation has decided to start a new project than the budget will provide an estimation of the cost which will be incurred to perform the project. With budget the company not only saves its cost but also has the opportunity to plan the business activities more efficiently. With budget the corporation knows how much material the organization will need and how much funding will have to be done to perform its activities on daily basis (Jonathan, 2010).

The budget plays key role in the decision making process. The corporation considers the project after evaluating the number of costs which will incurred in the project. If the budget of the projects higher and corporation's financial position does not allow it to take the project than the organization can cancel such project. Similarly if the budget of the project is lower and the corporation has enough resources to start the new project than the organization can select such project (Jonathan, 2010).

Conclusion

It is concluded that uncountable costs are the costs which cannot be controlled by the management of the organization, on the other hand, the controllable costs are the costs that can be controlled or influenced by the decision taken by the management of any organization .The opportunity cost can be explained as the benefit which the organization or any business has lost because it has selected another alternative. The costs which are incurred in the organization and are no longer recoverable by the corporation are known as sunk cost. The budget provides a brief overview of how much cost will incurred in performing the business activities. If the corporation has decided to start a new project than the budget will provide an estimation of the cost which will be incurred to perform the project. With budget the company not only saves its cost but also has the opportunity to plan the business activities more efficiently. With budget the corporation knows how much material the organization will need and how much funding will have to be done to perform its activities on daily basis.

References of Types of Costs

Brett Q Ford.Sandy J. Lwi, A. L. (2018). The cost of believing emotions are uncontrollable: Youths’ beliefs about emotion predict emotion regulation and depressive symptoms. Journal of Experimental Psychology: General, 147(8), 1170.

Crosson, S. V., & Needles, B. E. (2010). Managerial Accounting. Cengage Learning.

Davis, C. E., & Davis, E. B. (2010). Managerial Accounting for Strategic Decision Making, Preliminary Edition. John Wiley & Sons.

Jonathan, B. (2010). Financial Management. Pearson Education India.

Management, I. o. (2013). Working with Costs and Budgets. Routledge, .

Myer:, R. K. (2013). An opportunity cost model of subjective effort and task performance. Behavioral and brain sciences, 36(6), 661-679.

Warren, C., Reeve, J. M., & Duchac, J. (2016). Financial & Managerial Accounting (14 ed.). Cengage Learning.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2009). Financial Accounting (7 ed.). John Wiley & Sons.