Which type of costs does the evaluation of contingencies typically involve?

The evaluation of contingencies typically involves potential costs, which are costs that may occur in the future but are not guaranteed to do so. These costs are associated with risks that a business might face, such as the potential for legal liabilities, natural disasters, or other unforeseen events that could impact financial stability. Understanding potential costs enables organizations to plan for uncertainties and allocate resources effectively in order to mitigate risks.

In contrast, fixed costs refer to expenses that remain constant regardless of the level of production or services provided, while variable costs change in proportion to the activity level. Direct costs can be traced directly to a specific product or service but do not capture the uncertainty and risk aspects that potential costs do. The focus on potential costs during contingency evaluations helps organizations prepare for scenarios that could lead to additional expenditures or financial obligations.