Types of costs company

Kotler "Marketing Management"

Part 5

A company's costs take two forms, fixed and variable. Fixed costs (also known as overhead) are costs that do not vary with production or sales revenue. A company must pay bills each month for rent, heat, interest, salaries, and so on, regardless of output. Variable costs vary directly with the level of production. For example, each hand calculator produced by Texas Instruments involves the cost of plastic, microprocessor chips, packaging, and the like. These costs tend to be constant per unit produced. They are called variable because their total varies with the number of units produced.

The division of costs for variables and fixed is not unique. Another base for the classification of costs may be relevant to their products. Expenses that can be directly attributed to specific products, called straight, those that can be attributed only to all products, or a few species - the overhead (or indirect). There is an ambiguous line between these classifications. Thus, the production of molds for stamping refers to direct costs (can be attributed directly to specific products), but is not a variable cost (the same mold can be made different numbers of products depending on the order). On the other hand, power generation is an overhead (can not be attributed to specific products), while its consumption depends on production volume.


In turn, the overhead costs are divided into general production costs, general expenses and business expenses. Overhead costs associated with operation and maintenance of the main production called general production costs. They are distributed in proportion to the product chosen base (most often at the same time use the direct costs of labor). Production costs are, summing distributed overhead costs and direct costs. Total cost is the sum of production costs, general and commercial expenses.

Disadvantages of pricing based on the total cost described in the section on expensive methods of pricing.


Marginal costs play an important role in economic theory. The marginal cost - a cost that fall on the production of an additional unit of production. If the dependence of costs on the volume of production is linear, variable costs per unit of output equal to the limit.


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