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Accountants are very concerned about the "cost" of executing business. This is the one term that every company needs to focus on, because if expenses can be reduced, it follows that profit can rise. If you don't comprehend the costs concerned in "carrying out your business" then there is not much hope that your company will Survive.
Interestingly, CPAs tend to sub divide the expression "Cost" into six distinct types. They are: Direct Costs, Indirect Costs, Fixed Costs, Variable Costs, Relevant Costs, and Irrelevant Costs. I will now attempt to illustrate them one by one, hoping that you will have a clearer picture in your mind Of these "costs" when speaking to an accountant.
Direct Costs
Direct costs are costs which are directly connected to a specific product, service, or a group of associated items known as a product line. They are the expenses connected with one source of sales revenue, a business unit or even a certain operation of the organization. For instance, the price of hamburger meat, the price of hamburger buns, of mustard, catsup, and many other components of the burger, are each a direct expense of creating that famous sandwich.
Indirect Costs
An indirect cost is a peculiar variety of cost. It can't be affixed to any certain product. For instance, the expense of labor to make that hamburger is a direct expense, but the expense connected with repairing the air conditioner at a hamburger joint is an indirect expense. It is not directly related to the building of the hamburger itself.
Every single enterprise must devise a method of allocating indirect costs to their various unique items, sources of gross sales revenue, company units, and so on. Just about all allocation techniques are arbitrary to one level or another. Enterprise professionals and their accountants should regularly keep an eye on the allocation procedures employed for indirect cost, as this is a line item that can be abused.
Fixed Costs
This is a cost which stays constant, regardless of any change in a company's activity. A great example of this is the mortgage (or lease or rent) on your building. It will be the same, year in and out. The price is fixed and you can count on seeing it each month.
Variable Costs
Conversely, variable charges can increase or decrease in proportion to your company activity. Changes like fluctuations in gross sales or production level. A great illustration of this is gasoline which is used in transporting goods. As fuel price ranges vary, so do its associated price to the company.
Relevant Costs
This is a managerial kind of accounting phrase. It aids in making business decisions. Relevant costs are basically the long term expenses which might be incurred, depending on which tactic the company employs. If a hamburger eatery decides to open a new store, the shifting cost of hamburger meat ought to be taken into account as a relevant cost.
Irrelevant Costs
This is another managerial accounting phrase. Once a supervisor contemplates taking a long term action these costs are the ones that can be disregarded for some reason or another. They are costs which could possibly lead you to make a wrong decision. Irrelevant costs are most likely of the type that were incurred in the past and don't possess much bearing on the future path of the company.
Understanding these various kinds of costs can help you talk with your CPA or other accounting professional a lot more easily, as well as give you a greater understanding of accounting principles.
Interestingly, CPAs tend to sub divide the expression "Cost" into six distinct types. They are: Direct Costs, Indirect Costs, Fixed Costs, Variable Costs, Relevant Costs, and Irrelevant Costs. I will now attempt to illustrate them one by one, hoping that you will have a clearer picture in your mind Of these "costs" when speaking to an accountant.
Direct Costs
Direct costs are costs which are directly connected to a specific product, service, or a group of associated items known as a product line. They are the expenses connected with one source of sales revenue, a business unit or even a certain operation of the organization. For instance, the price of hamburger meat, the price of hamburger buns, of mustard, catsup, and many other components of the burger, are each a direct expense of creating that famous sandwich.
Indirect Costs
An indirect cost is a peculiar variety of cost. It can't be affixed to any certain product. For instance, the expense of labor to make that hamburger is a direct expense, but the expense connected with repairing the air conditioner at a hamburger joint is an indirect expense. It is not directly related to the building of the hamburger itself.
Every single enterprise must devise a method of allocating indirect costs to their various unique items, sources of gross sales revenue, company units, and so on. Just about all allocation techniques are arbitrary to one level or another. Enterprise professionals and their accountants should regularly keep an eye on the allocation procedures employed for indirect cost, as this is a line item that can be abused.
Fixed Costs
This is a cost which stays constant, regardless of any change in a company's activity. A great example of this is the mortgage (or lease or rent) on your building. It will be the same, year in and out. The price is fixed and you can count on seeing it each month.
Variable Costs
Conversely, variable charges can increase or decrease in proportion to your company activity. Changes like fluctuations in gross sales or production level. A great illustration of this is gasoline which is used in transporting goods. As fuel price ranges vary, so do its associated price to the company.
Relevant Costs
This is a managerial kind of accounting phrase. It aids in making business decisions. Relevant costs are basically the long term expenses which might be incurred, depending on which tactic the company employs. If a hamburger eatery decides to open a new store, the shifting cost of hamburger meat ought to be taken into account as a relevant cost.
Irrelevant Costs
This is another managerial accounting phrase. Once a supervisor contemplates taking a long term action these costs are the ones that can be disregarded for some reason or another. They are costs which could possibly lead you to make a wrong decision. Irrelevant costs are most likely of the type that were incurred in the past and don't possess much bearing on the future path of the company.
Understanding these various kinds of costs can help you talk with your CPA or other accounting professional a lot more easily, as well as give you a greater understanding of accounting principles.
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