Define and discuss the different kinds of costs in accounting.

Question

What will be an ideal response?

Answer 1

Answers will vary. Accountants define cost as the value of what is given up in exchange for something else. Depending on the type of problem they are analyzing, managerial accountants actually measure and evaluate several different types of costs.Out-of-pocket costs (also called explicit costs) are usually easy to measure because they involve actual expenditures of money or other resources. The wages a company pays to its workers, the payments it makes to suppliers for raw materials, and the rent it pays for office space are examples.Implicit cost is the opportunity cost that arises when a firm uses owner-supplied resources.Fixed costs don't change when the firm changes its level of production. Examples of fixed costs include interest on a bank loan, property insurance premiums, rent on office space, and other payments that are set by a contract or by legal requirements.Variable costs are costs that rise (vary) when the firm produces more of its goods and services. As a company ramps up its production, it is likely to need more labor and materials and to use more electrical power. Thus, payments for many types of labor, supplies, and utilities are variable costs.