Cost Descriptors Memo As the human resources manager of our organization, it is imperative that you understand the current discussions surrounding company budgetary issues. Several terms are used to describe cost. Hopefully this memo will help you better understand the terms used when discussing our budget. Terms of significance include, but are not limited to: fixed, variable, direct, indirect, sunk, marginal and total costs. Fixed costFixed cost is a cost that does not vary depending on production or sales levels, such as rent, property tax. , insurance or interest charges (Investorwords, 2008). Fixed costs remain constant regardless of the company's activities. An example of a fixed cost in our organization is the construction lease. If we rent our office building for $4,500 per month, that amount 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 costs that can vary over time. Variable Cost A variable cost is a cost of labor, material, or overhead that changes as volume changes (InvestorWords, 2008). Variable costs often include labor expenses and raw material costs, because labor and raw materials generally must be increased to increase production. When production is zero, variable cost is equal to zero. Some examples of variable costs would be cost of goods sold, shipping costs, cost of direct materials or supplies, and salaries of part-time or temporary staff. While the total variable cost changes as production increases, the total fixed costs remain the same. Direct Cost A direct cost can be directly attributed to the production of specific goods or services (InvestorWords, 2008). Direct costs do not necessarily have to be allocated to a product, service or other cost object. For example, if a company produces computer chips, the cost of the hardware and employee salaries 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 CostIndirect costs represent expenses related to business activity that are not easily identified with a particular product or department but are necessary for the operation of the business. Simply put, indirect costs are those costs that are not classified as direct costs. An example of an indirect cost would be the salaries of our company's managers because they provide a service to the entire company and not just to a single department or function..