Click Here: All Types of Costs Index? Various kinds of Costs with Examples – From M to W? Actual cost is defined as the cost or costs that a firm incurs for producing or acquiring a good or service. The real costs or expenditures are documented in the books of accounts of a business unit. Actual costs are also known as “Outlay Costs” or “Absolute Costs” or “Acquisition Costs”.

Opportunity cost can be involved with the cost of forgone opportunities/alternatives. Quite simply, it’s the return from the second best use of the companies’ resources which the firms forgo to be able to avail of the return from the best use of the resources. It can also be said as the evaluation between the policy that was chosen and the plan that was declined. The idea of opportunity cost focuses on the net revenue that may be generated in the next best use of the scare input. Opportunity cost is also called as “Alternative Cost”.

If a company owns the land, there is no cost of using the land (ie., the lease) in the firms account. But a chance is had by the company cost of using the land, which is adding up to the rent forgone by not allowing the land out on rent. Sunk costs aren’t taken into account in decision – making as they do not differ with the changes in the foreseeable future. Sunk costs are a part of the outlay/actual costs. Sunk costs are also known as “Non-Avoidable costs” or “Inescapable costs”.

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Examples: All of the past costs are believed as sunk costs. The best example is the amortization of past expenses, like depreciation. Incremental costs are in addition to costs caused by a big change in the type of level of business activity. As the expenses can be avoided by not getting any variance in the experience in the experience, also, they are called as “Avoidable Costs” or “Escapable Costs”. Example: Change in distribution channels adding or deleting something in the merchandise line. Explicit costs are those expenditures/expenditures that are actually paid by the company.

These costs are documented in the books of accounts. Explicit costs are important for calculating the loss and profit accounts and guide in financial decision-making. Implicit costs are an integral part of the opportunity costs. They will be the theoretical costs ie., they aren’t recognized by the accounting system, and aren’t recorded in the books of accounts but are extremely important in certain decisions. They are also called as the earnings of those utilized resources which belong to the owner himself.

Implicit costs are also known as as “Imputed costs”. Out of pocket costs are those costs are expenditures that are current obligations to the outsiders of the company. All the explicit costs fall into the group of out of pocket costs. Economic costs are related to future. They play a vital role in business decisions as the costs considered in decision – making are usually future costs. They have the type similar to that of incremental, imputed explicit and opportunity costs. Direct costs are those which have a direct relationship with a unit of operation like manufacturing a product, organizing a process or a task etc. In other words, direct costs are those that are directly and definitely identifiable.

The nature of the immediate costs are related with a specific product/process, they vary with variations in them. Therefore, all direct costs are variable in character. Examples: In operating railway services, the expenses of wagons, engines, and instructors are immediate costs. Indirect costs are those that can’t be and definitely identifiable in relation to a plant easily, a product, a process or a department.