Cost Descriptors Paper
MEMO
TO: HR Manager
FROM: Shevonne Prescott-La Cour
DATE: February 7, 2010
RE: Cost Descriptor

It has come to my attention that since the last meeting, there has been some misunderstanding of the on-going budget discussion. There are several terms used to describe cost. Hopefully this memo will provide a better understanding of the terms used when discussing budget. The terms of importance, but not limit to include: fixed, variable, direct, indirect, sunk, marginal, and total cost.
Fixed Cost
Fixed cost is periodic cost that remains (more or less) unchanged irrespective of the output level or sales revenue of a firm, such as depreciation, insurance, interest, rent salaries, and wages. While, in practice, all costs vary over time and no cost is a purely fixed cost, the concept of fixed costs is necessary in short-term cost accounting. Firms with high fixed costs are significantly different from those with high variable costs. This difference affects the financial structure of the firm as well as its pricing and profits. The break even point in such firms (in comparison with high variable cost firms) is typically at a much higher level of output and their marginal profit (rate of contribution) is also much higher (www.businessdictionary.com). An example of fixed cost is lease payment. If our business is leasing this building at $2,500.00 per month, then we will pay that amount each month, no matter how well or how poorly our business is doing.
Variable Cost
Variable cost is the costs of production that vary directly in proportion to the number of units produced. Variable costs often include labor expenses and raw material costs, because labor and raw material usually must be increased to increase output. Firms for which variable costs represent a high proportion of total costs are usually less likely to experience large