Mba 503 Cost Accounting

Introduction:

What would happen if your Human Resource Department had no idea what budget terminology or concepts were? Would that department be effective in their decision making and forecast projections? The HR Department must be well versed in these areas. This paper will explore different terminology and breakdown what each means along with giving specific examples of each. This will help the HR Department to become a more efficient machine for the corporation. Terms included will be fixed costs, variable costs, sunk costs, marginal costs, total costs, direct costs and indirect costs.

Fixed and Variable Costs:

Fixed costs are costs that do not change with respect to production or sales levels. These may include rent, insurance, membership dues, leases, salaries, and loan payments. As business components change, these stay constant. An example of a fixed cost would be commercial loan payments. These payments are the same amount each month until the loan is repaid.

Variable costs are the costs that change in respect to the sales and production levels of a company. These costs include materials, hourly wage employees, utilities, office supplies budget, and inventory. As business components change with demand, variable costs will change to accommodate the situation. An example of a variable cost would be utilities. If a company is using more electricity for the output of their goods in a particular month, the cost will increase. Conversely, if a company slows production, the costs of the electricity used will decrease.

Sunk Costs:

Sunk costs are the costs that have already happened to the business. These costs cannot be refunded or gotten back. An example would be buying a non-refundable plane ticket. The costs of the ticket are an expense but cannot be refunded if the ticket is not used. Another example would be gift cards that were purchased and cannot be refunded as well. The company just has to expense that cost.

Marginal Costs:

Marginal costs are “the cost of an additional unit of output is the cost of the additional inputs needed to produce that output (Econmodel)”. This simply stated is the cost of doing business when another unit is produced. An example of this is the production of an automobile. If the production increases, there may be a need for a new production plant. This would be an additional cost to the business and cause the marginal costs to increase.

Total Costs:

Total costs describes “the total economic cost of production and is made up of production and is made up of variable costs, which vary according to quantity produced such as raw materials, plus fixed costs, which are independent of quantity produced such as expenses for assets like buildings (Wikipedia)”. An example of this is the addition of payroll (fixed cost) or raw materials (variable costs) for the automobiles mentioned above.

Indirect and Direct Costs:

Indirect costs are the expenses incurred during business transactions that are not easily