Types of Costs

Direct costs are those costs that cann be directly attributed to a product or product line, or to one source of sales revenue, or one business unit or operation of the business. An example of a direct cost would be the cost of tires on a new automobile.

The cost of labor or benefits for an auto manufacturer is certainly a cost, but it can't be attached to any one vehicle. Business managers and accounts should always keep an eye on the allocation methods used for indirect costs and take the cost figures produced by these methods with a grain of salt.

Fixed costs are those costs that stay the same over a relatively broad range of sales volume or production output. They're like an albatross around the neck of business and a company must sell its product at a high enough profit to at least break even.


Irrelevant costs are those that should be disregarded when deciding on a future course of action. Whereas relevant costs are future costs, irrelevant costs are those costs that were incurred in the past.

Variable costs can decrease and increase in proportion to changes in sales or production level. Variable costs vary proportionately with changes in production/.

Whereas relevant costs are future costs, irrelevant costs are those costs that were incurred in the past.

Relevant costs are essentially future costs that could be incurred, depending on what strategic course a business takes. If an auto manufacturer decides to increase production, but the cost of tires goes up, than that cost needs to be taken into consideration.

The cost of labor or benefits for an auto manufacturer is certainly a cost, but it can't be attached to any one vehicle. Business managers and accounts should always keep an eye on the allocation methods used for indirect costs and take the cost figures produced by these methods with a grain of salt.