2. Fixed Costs
Fixed costs are those that do not change throughout the life-cycle of a project. For example, if you are
constructing a road, the excavators and bulldozers are fixed costs. For software development projects, the physical
development space and development computers are fixed costs to the project.
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. Organizations with high fixed costs are significantly different from those with high
variable costs.
Examples:
Rent. This is a periodic charge for the use of real
estate owned by a landlord.
Salaries. This is a fixed compensation amount paid
to employees, irrespective of their hours worked.
Utilities. This is the cost of electricity, gas, phones,
and so forth. This cost has a variable element, but
is largely fixed.
3. Variable Costs
Variable costs, as the name suggests, are costs that change during the project life-cycle. Construction projects usually
have a long duration and can easily span several years.
A periodic cost that varies in step with the output or the sales revenue of a company.
Variable costs include raw material, energy usage, labor, distribution costs, etc. Companies with high variable costs are
significantly different from those with high fixed costs.
A variable cost is a corporate expense that changes in proportion with production output. Variable costs increase or
decrease depending on a company's production volume; they rise as production increases and fall as production
decreases.
4. Direct Costs
Direct costs are expenses that come out of the project budget directly. For example, if you have outsourced some of
your development work, the developers are expected to put in a specific amount of time, which is then billed for.
The developer salaries are direct costs.
A direct cost is a price that can be completely attributed
to the production of specific goods or services. Some
costs, such as depreciation or administrative expenses,
are more difficult to assign to a specific product and
therefore are considered to be indirect costs.
A direct cost can be considered a variable cost if it is
inconsistent and changes amounts often.
Examples:
Direct materials
Consumable supplies
Freight in and out
Sales commissions
5. Indirect Costs
Indirect costs are those that are shared across multiple projects. Indirect costs are sometimes also referred to as
oversight costs.
For example, in software development projects, it is common for a project manager or an architect to be partially
allocated across several projects. Hence, the cost of the project manager or architect will be shared among the
projects they are allocated to.
An indirect cost is any cost not directly identified with a
single, final cost objective, but identified with two or more
final cost objectives or an intermediate cost objective. It is
not subject to treatment as a direct cost.
After direct costs have been determined and charged
directly to the contract or other work, indirect costs are
those remaining to be allocated to the several cost
objectives.
