Costs

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Understanding Costs
Types of Costs

In accounting, understanding and analyzing business costs is essential. There are a whole host of methods which can be applied to cost analysis.

The type of costing approach adopted will depend on the type of industry in which the business operates.

TYPES OF COSTS

Opportunity Costs
Fixed Costs
Marginal Costs
Imputed Costs
Differential Costs

OPPORTUNITY COSTS: This is a very simple cost. The logic is looking at what the cost of doing something against the cost of not doing it at all.

For example it could be the benefits of buying new machinery and increases in productivity, against the cost of where not spending capital on new machinery could be applied in the business.

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FIXED COSTS: These costs remain relatively stable and are applied to the business, examples of fixed costs can be water rates, rent, business rate, etc. These rates will not generally be affected by increases/decreases in production.

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MARGINAL COSTS: This is based on looking at the additional costs which can be applied if additional products/services are sold/manufactured.

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IMPUTED COST: This is a cost applied to a product, based on overall production costs.

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DIFFERENTIAL COSTS: This can be described as looking at the differences in costs between two projects, to analysis which will cost a business the least amount of money.

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