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Historical, replacement, and budgeted costs are typically associated with time. Historical costs are used for external financial statements; replacement and budgeted costs are more often used by managers in conducting their planning, controlling, and decision-making functions.
Variable, fixed, mixed, and step costs describe cost behavior within the context of a relevant range. Total variable cost varies directly and proportionately with changes in activity; variable costs are constant on a per-unit basis. Costs that remain constant in total, regardless of changes in activity, are fixed. On a per-unit basis, fixed costs vary inversely with activity changes. Mixed costs contain both a variable and fixed component and are usually separated (using the high-low method or least squares regression analysis) into these components for product costing and management’s uses. Step costs can be variable or fixed, depending on the size of the “step” change (small or large, respectively) that occurs relative to the change in activity. Accountants select a relevant range that allows step variable costs to be treated as variable and step fixed costs to be treated as fixed.
For financial statements, costs are either considered unexpired and reported on the balance sheet as assets, or expired and reported on the income statement as expenses or losses. Costs may also be viewed as product or period costs. Product costs are inventoried and include direct material, direct labor, and manufacturing overhead. When the products are sold, these costs expire and become cost of goods sold expense. Period costs are incurred outside the production area and are usually associated with the functions of selling, administrating, and financing.
