Cost Information

Direct costs refer to costs that can be clearly identified with a particular product, department, or project such as raw materials.
Indirect costs, also known as overheads, are costs that cannot be easily traced to a single product, department, or project such as rent or salaries.
Fixed costs are costs that do not change with a change in output such as rent and salaries for permanent staff.
Variable costs vary directly with the level of output such as raw materials used in production.
Semi-variable costs consist both of fixed and variable components. For instance, a utility bill may have a fixed charge plus an additional cost based on usage.

Establishing a pricing strategy requires accurate cost information. By understanding costs, businesses can determine how to price products to achieve profitability.
Making investment decisions relies heavily on the cost information. For instance, the viability of purchasing new equipment requires cost-benefit analysis.
Management needs to understand cost behaviour for budgeting and control. For instance, recognising which costs are fixed or variable allows more accurate forecasting.
Cost information leads to improved efficiency. When the business knows where its money is going, it can find ways to reduce costs or improve efficiency.

Absorption costing involves charging all costs, both variable and fixed, to the product.
Marginal costing only includes variable costs in product costs. Fixed costs are treated as period costs and are taken off in their entirety against the contribution for the period.
Activity based costing (ABC) allocates overheads based on the activities that drive costs, rather than by volume of output.

Cost information may not include opportunity costs, which are the benefits lost due to selecting one alternative over another.
Cost data can become outdated rapidly in a dynamic business environment, thus leading to inaccurate decision making.
Sometimes, indirect costs cannot be allocated accurately to the products or services thereby distorting the true product cost known as the overhead allocation problem
Costs classified as fixed in the short term may become variable in the long term and vice versa, posing a challenge in accurate cost classification.