Types of costs

Types of costs

Types of costs

Costs are expenses the company has to pay during the production of its product. There are 3 main types of costs, these are: fixed costs, variable costs, and semi-variable costs:

Fixed costs

  • Costs that don't change over a period of time and don't vary with output.
  • E.g. salaries, rent, tax, insurance, heating and lighting.
  • Fixed costs can also be called indirect costs as they are not directly associated with the final product.
  • Fixed costs have to be paid even if the company is not producing any goods.

Variable costs

  • Costs that vary directly with output so when output increases, variable costs also increase.
  • E.g. raw materials, electricity.
  • Variable costs can also be called direct costs as they are directly associated with production.

Semi-variable costs

  • These costs have fixed and variable elements.
  • E.g. a person working for the company may have a fixed salary but may also earn commission on sales.

Total costs are calculated by adding together fixed, variable and semi-variable costs.

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