There are several concepts found in accounting systems that serve as decision-making tools for the business owner, manager, or professional.
Fixed, Variable, and Other styles of Costs
Fixed, variable, incremental, opportunity, and sunk costs describe different types of costs to the business.
Fixed costs include all costs that don’t vary with activity for an accounting period. Fixed costs are the inevitable costs that has got to be paid at any time irrespective of the amount of output and of the quantity of resources used. a set cost doesn’t, in theory, vary with activity or sales. Such costs often include offices, factories, depreciation, and insurance or professional indemnity.
Variable costs are costs that are some function of activity. Variable costs include the apparent things like sales commissions, raw materials, components, distribution, and deal financing.
Incremental costs are those costs (or revenues) that change due to an incremental change in activity, as compared to people who are unaffected.
They are costs that may occur if a specific course of action were taken.
Opportunity costs sit down with alternatives or opportunities that are sacrificed in favor of the chosen solution. Because resources are limited, any decision in favor of 1 project (service, goods, upgrade, etc.) means doing without something else.
Sunk costs include prior costs that can’t be recovered.
Activity-Based Costing
A financial analysis costing methodology associates specific efforts and personnel with specific tasks, allowing the tasks to be analyzed and also the current costs dedicated to specific tasks to be understood. A simple activity-based costing analysis are often an analysis of labor performed by a particular employee or unit in a very year and therefore the cost associated with anytime the work is finished to hit an annual cost for that activity. for instance, an organization considering outsourcing its payroll function may analyze what number people within the human resources and accounting departments are involved in processing payroll each pay period, assess the associated salaries and overhead, multiply by the number of pay periods each year, and gain an activity-based cost of payroll processing. This assessment may then be compared to the quote from an outsource payroll preparation company to see the relative cost/benefit of outsourcing versus internally processing the payroll function.
