Question

What are four types of costs that a business must consider in making business decisions?

Answer 1

Costs are the necessary expenditures that must be made to run a business; thus every factor of production has an associated cost. The four types of costs that a business must consider in making business decisions are:

1) Direct versus indirect costs: Direct costs are easy to match with a process or product, while indirect costs are more distant and have to be allocated to a process or product.

2) Fixed versus variable costs: This is where one's business sells more units of a particular item; thus some costs increase accordingly (variable costs), but others don’t budge one bit (fixed costs).

3) Relevant versus irrelevant costs: This is where not every cost is essential to every decision you need to make about your business. Hence the distinction between relevant and irrelevant costs.

4) Actual, budgeted, and standard costs: This is where the actual costs of your business incurs may differ (though hopefully not significantly) from its budgeted and standard costs.