Direct costs – costs that can be directly attributed to a product or product line, to one source of sales revenue, one business unit or operation of the business. For example, the cost of tires on a new automobile.
Indirect costs – cannot be attached to any specific product, unit or activity. Each business has its own method of allocating indirect costs to different products, sources of sales revenue and business units. Business managers and accounts should always keep an eye on the allocation methods used for indirect costs; this means to take the cost figures (produced by these methods) with a grain of salt.
Fixed costs - costs that stay the same over a relatively broad range of sales volume or production output.
Variable costs – can increase and decrease due to changes in sales or production level. Variable costs fluctuate in proportion with changes in production.
Relevant costs – future costs that could be incurred, depending on the strategic course taken by a specific business. For example, if car manufacturer wants to to increase production, and the cost of tires goes up – these costs need to be taken into consideration.
Irrelevant costs – costs 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.
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