Cost Descriptions Paper

Running head: Cost Descriptions

Cost Descriptions Paper

University of Phoenix

MBA/503 вЂ" Introduction to Finance and Accounting

Abstract

The intent of this informative paper is to provide the HR Manager with an understanding of making effective budget decisions. All levels of management should have clear and full knowledge of basic accounting language in order to grasp the concepts of the various accounting terms such as fixed costs which are defined as expenses that do not vary depending on production or sales levels, such as rent, property tax, insurance, or interest expense. Fixed costs are the costs of the investment goods used by the firm, on the idea that these reflect a long-term commitment that can be recovered only by wearing them out in the production of goods and services for sale (Drexel University, 2006, p.1).

In essence, having the knowledge of various terms used to describe costs will help this HR Manager create effective decisions for its company.

Cost Descriptors Paper

The purpose of this paper is to help the human resource manager understand current budget decisions and to identify various terms used to describe cost. The term cost can be defined as an amount to be paid or it as a requirement for a payment to purchase a product or a service. In this paper, I will describe several terms relating to cost including fixed, variable, indirect, direct, sunk costs as well as describe incremental costs and opportunities cost and provide examples of each.

The term fixed cost relatively includes all costs that do not vary with activity for an accounting period. In other words, fixed costs are known as costs that all companies must pay regardless of their sales or production levels. The costs are unmovable and must be paid each month or year without exception. For instance, I wanted to re-open a skating rink in a building that was for lease. In doing research on the building and writing out a preliminary budget to get an idea of how much I would have to spend to get the rink up and running, I made a list of fixed costs and the variable costs. According to my list, the fixed costs included electricity, water, telephone, and monthly rent.

The term variable cost can be described as all other costs that change as conditions change. A variable cost is a cost that changes in proportion to a change in a company's activity. Examples of variable costs are materials, fuel, labor and maintenance. As the time period is extended, more costs become variable. If there’s more demand for your product or service then you will have to increase production. As you increase production, you need more raw materials to work with. These raw materials represent a cost and that cost varies depending on how much of your product you are (2003-2007, Business Source).

The term indirect cost represents the company’s expenses that are not readily identified with a project function or activity, but are necessary for the general operation of the company and the conduct of activities it performs (2007,McDonald). Some examples of indirect costs are taxes, personnel, and administration costs.

The term direct cost is also used to describe costs in the company. Direct costs are opposite of indirect costs in the way that they can be easily identified with a particular project. An example of direct costs would be ordering supplies for a specific project such as binders, divider tabs, and paper. At my place of employment, we are constantly buying office supplies that should be used and charged for particular projects. Direct costs can also be used to calculate time spent on a task used for a project. When I process my weekly timesheet, there’s an area that asks how much time was spent doing a project related task which allows the HR department to correctly charge the department for that project.

Costs that cannot be recovered are known as sunk costs. The idea of sunk costs is often employed when analyzing business decisions. Buying a non-refundable ticket to a movie before the movie starts and later decide that you don’t