Basic Cost Concepts
Introduction
Term cost is used in this very form. In reference to production/manufacturing
of goods and services cost refers to sum total of the value of resources used
like raw material and labour and expenses incurred in producing or
Manufacturing of given quantity.
Discussion
Cost Concept
According to this concept the asset is recorded in the books of accounts at the price paid for it and not at its market value. For example: if a business entity purchases a building valued at $15 million from a friend for $12 million, this asset would be recorded at $12 million and not at $ 15 million, because for the business entity the cost was $12 million and not $15 million.
Elements of cost
1)Material
2)Labour
3) expenses
Material: To produce or manufacture material is required. For example to manufacture
shirts cloth is required and to produce flour wheat is required.
Material is classified into two categories:
_ Direct Material
_ Indirect Material
Labour: Labour is the main factor of production. For conversion of raw material into
Finished goods, human resource is needed, and such human resource is
termed as labour.
Labour can be classified into two categories:
_ Direct Labour, and
_ Indirect labour
Expenses: All cost incurred in the production of finished goods other than material
cost and labour cost are termed as expenses. Expenses are classified into
two categories:
Direct expenses, and
Indirect expenses (An item of overheads)
Components of total cost
Total Costs as Fixed Costs plus Variable Costs.
Fixed cost :
In management accounting, fixed costs are defined as expenses that do not change as a function of the activity of a business, within the relevant period. For example, a retailer must pay rent and utility bills irrespective of sales.
Variable cost:
Variable costs are expenses that change in proportion to the activity of a business. Variable cost is the sum of marginal costs over all units produced. It can also be considered normal costs.
Classification of cost:
| CLASSIFICATION | BASE TO IDENTIFY | |
| Relevant Cost | Irrelevant Cost | Affected or unaffected by the decision |
| Opportunity Cost | Outlay Cost | Nature of sacrifice |
| Historical Cost | Future Cost | Degree of anticipation in its determination |
| Variable Cost | Fixed Cost | Relationship with the volume of activity |
| Identifiable Cost | Common Cost | Identification with an operation unit |
| Disbursement Cost | Virtual Cost | Relationship with an immediate cash flow |
| Incremental Cost | Inmerged Cost | Relationship with an increase in activity |
| Avoided Costs (Discretionary) | Commited Cost | Grade of control |
| Replacement Cost | Historical Cost | Moment of valuation |
CONCLUSION:
Thus, the amount of expenditure (actual or national) incurred on or attributable to a given thing or activity. It also depends upon the nature of the business, or industry and the context in which it is used. It may also be noted that there is no such thing as exact cost or a true cost because no figure of cost is true in all circumstances and for all purposes.
Refrences:
http://www.Globusz.com
www.Nos.org
books:
accounting for management by SN Maheshwari
concept of cost-pawan(B)
elements of cost-shaina(C)
classification of cost and elements of total cost-komal(A)
well done
ReplyDelete