Relationships Between Types of Costs

We have introduced two major classifications of costs: direct/indirect and variable/fixed. Costs may simultaneously be as follows:

Exhibit 2-5 shows examples of costs in each of these four cost classifications for the Tesla Model 3.

Exhibit 2-5

Examples of Costs in Combinations of the Direct/Indirect and Variable/Fixed Cost Classifications for a Car Manufacturer

A two by two matrix diagram shows the examples of costs in combinations of various types of classifications such as direct, indirect, variable, and fixed costs for a car manufacturer.

The vertical line traces the cost-behavior pattern and the horizontal line traces the assignment of costs to cost object.

The details of the assignment of costs to cost object for the two types of cost-behavior pattern are as follows:

  1. Cost-behavior pattern: Variable costs

    1. Assignment of costs to cost object: Direct costs

      • Cost object: Tesla Model 3s produced. Example: Tires used in assembly of automobile.

    2. Assignment of costs to cost object: Indirect costs

      • Cost object: Tesla Model 3s produced. Example: Power costs at the Tesla factory. Power usage is metered only to the plant, where multiple products are assembled.

  2. Cost-behavior pattern: Fixed Costs

    1. Assignment of costs to cost object: Direct costs

      • Cost object: Tesla Model 3s produced. Example: Salary of supervisor on Tesla Model 3 assembly line.

    2. Assignment of costs to cost object: Indirect costs

      • Cost object: Tesla Model 3s produced. Example: Annual depreciation costs for the Tesla Factory in Fremont. Depreciation costs are for the whole plant, where multiple products are produced.