Classification of costs by their source

Last updated: 28.03.2016

Costs can be divided based on where they arise into:

  • External (primary) costs arise from the external sources, e.g. cost of raw material, power, wages and salaries.
  • Internal (secondary) costs arise from internal sources, i.e. from the activities performed within the entity. They may consist of a number of previously incurred external costs and intercompany turnover.

 

TOTAL COSTS ARE THUS USUALLY NOT THE SUM OF EXTERNAL AND INTERNAL COSTS (external costs would then be included multiple times and internal costs may contain an internal margin).

 

More about other possible cost divisions here.



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