Costs or expenses are monetary measures of financial sacrifices with which an organization, a person or a government, must bear in order to achieve their goals. The goals can pertain to the use of a product or service, used to obtain other goods or services, etc.
In business, any reduction of corporate net worth, which is not conditioned by payment to the owners or shareholders, represents a cost reduction. To determine the expenditure balance of a term, it requires a periodization of the expenditure, so as effect proper assignment for a given accounting period.
In essence, costs are expenses that the organization incurs in order to prepare products for distribution and sales. One basic difference is that spending for trading purposes brings a financial return and belongs to the core activity, for which the entity was created. Some expenditures on non-commecial activities typically do not generate financial returns. But only provide a certain comfort or functionality to the business environment.
The reason for classifying the current expenditures of an entity in expenses and costs is that it first goes straight to the result. Costs connected to the production of goods and sales, will consequently yield profitable results, which could take months or even years.
Fixed costs pertain to those that have a total value that does not change with the variation of the quantity of goods or services produced. Instead, their unit value changes inversely proportional to the change in quantity produced, eg payment of rent. Variable costs have a unit value that does not change with changes in quantities produced, but whose total values vary in direct relation with the variation of the quantities produced, eg, feedstock.
On the other hand, total cost is the sum of fixed costs and variable costs, represented by the formula TC = FC + VC. Direct costs are susceptible to being identified with the resulting goods or services, or have portions defined as appropriate for each unit or batch produced. Indirect costs depend on the adoption of some criterion of division for their allocation to production.
Cost absorption is a system that determines the value of the costs of goods or services, based on all production costs including direct costs, indirect, fixed and variable. Absorption costing is the method that attributes manufactured poducts to all costs of production, either directly or indirectly. Thus all costs, whether fixed or variable, are absorbed by the products.
Cost-standard are predetermined costs, however, unlike the estimated costs they are calculated based on operating parameters, and used in repetitive production operations, where the individual cost of compensation for each repetition is calculated. ABC costing: allocation of indirect costs are based on related activities.