Cost Descriptors Memo As the HR manager of our organization, it is critical to understand the current discussions surrounding the company's budget issues. There are several terms used to describe cost. We hope this reminder provides you with a better understanding of the terms used when discussing our budget. Terms of importance include, but are not limited to: fixed, variable, direct, indirect, sunk, marginal, and total cost. Fixed Cost Fixed cost is a cost that does not vary depending on production or sales levels, such as rent, property tax, insurance, or interest expense (Investorwords, 2008). Fixed costs remain constant regardless of the company's activities. An example of a fixed cost in our organization is the building lease. If we rent our office building for $4500 per month, this will remain the same regardless of the company's financial performance. Other examples of fixed costs include insurance and property taxes. Fixed costs are very different from variable costs. Variable costs are those costs that can vary over time. Variable Cost A variable cost is a cost of labor, material, or overhead that changes with changes in volume (InvestorWords, 2008). Variable costs often include labor expenses and raw material costs, because labor and raw materials usually must be increased to increase production. When production is zero, variable cost is zero. Some examples of variable costs might be the cost of goods sold, shipping costs, the cost of direct materials or supplies, and wages of part-time or temporary staff. While total variable cost changes as production increases, total fixed costs remain the same. Direct Cost A direct cost can be directly traced to the production of specific goods or services (InvestorWords, 2008). Direct costs do not need to be allocated to a product, department, or other cost object. For example, if a company produces computer chips, the cost of the material and the salary of the employees are direct costs because both of these expenses are directly related to the production of the product. Indirect cost is the exact opposite of direct cost. Indirect costs represent expenses for carrying out an activity that are not easily identifiable with a particular product or department but are necessary for the operation of the company. In simple terms, indirect costs are those costs that are not classified as direct costs. An example of an indirect cost could be the salary of our company's managers because they provide a service to the entire company and not just a single department or function.