Concept of costs


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Concept of costs

  1. 1. Concept Of Cost Accounting <br />By <br />Arbaaz khan<br />
  2. 2. Introduction <br /><ul><li>In accounting, costs are the monetary value of expenditures for supplies, services, labor, products, equipment and other items purchased for use by a business or other accounting entity.
  3. 3. It is the amount denoted on invoices as the price and recorded in bookkeeping records as an expense or asset cost basis.
  4. 4. The concept implies the need of different sets of cost data for different objectives, purposes & situations</li></li></ul><li>Classification Of Costs Concepts<br />
  5. 5. Cost Related To Income Measurement<br />
  6. 6. Cost Related To Income Measurement<br /><ul><li>Product Cost: those costs, which can be identified with goods produced or purchased for resale, they vary with production.
  7. 7. Examples: Raw material & Direct labor.
  8. 8. Period Cost: those costs which are matched against the revenue of the current period, that is the sum of period costs is deducted as expenses from the revenue of current period only.
  9. 9. Expired Cost: these are the cost s which cannot contribute to the production of future revenues.
  10. 10. Unexpired Cost: these are the cost which have the capacity of contributing to the production of revenue in the future
  11. 11. EXAMPLE: inventory</li></li></ul><li>Cost Related To Profit Planning <br /><ul><li>Profit planning is concerned with taking a series of decisions where alternatives are available. Future costs are relevant costs in the profit planning function</li></li></ul><li>Cost Related To Profit Planning <br />
  12. 12. Cost Related To Profit Planning <br /><ul><li>Fixed costs : these costs are associated with those inputs, which do not vary with changes in volume of output or activity within a specified range of activity or output (relevant range) for a given budgeted period
  13. 13. Example: Rent of a factory, office premises, property insurance.
  14. 14. Variable costs: costs that tend to vary in total in direct proportion or in a one-to-one relationship to changes in production activity, sales activity or some other measure of volume are referred to as variable costs within relevant range for given budgeted period
  15. 15. Examples: material, labor, supplies </li></li></ul><li>Cost Related To Profit Planning <br /><ul><li>Semi-variable Costs: costs which are neither perfectly variable nor absolutely fixed in relation to volume changes are called semi-variable costs. Also known as mixed costs.
  16. 16. Examples: power, repairs & maintenance
  17. 17. Future Costs: Costswhich are reasonably expected to be incurred at some future date as a result of a current decision are called future costs.
  18. 18. Budgeted Costs: when an operating plan involving future costs is accepted, and incorporated formally in the budget for a specific period, such costs get converted to budgeted costs</li></li></ul><li>Cost For Control<br />
  19. 19. Cost For Control<br /><ul><li>Controllable & Uncontrollable Costs: an item of costs is controllable if the amount of cost incurred in (or assigned to) a responsibility centre is significantly influenced by the action of the manager of the responsibility center. Other wise non-controllable costs
  20. 20. Direct & Indirect Costs: those costs which can be identified logically and practically in their entirety to a particular department or a product are called direct costs.Those costs which are not particularly identifiable exclusively and wholly to a particular product, division or segment are called indirect costs or common costs.
  21. 21. Example: salary of a chief executive officer</li></li></ul><li>Cost For Decision Making<br />
  22. 22. Cost For Decision Making<br /><ul><li>There are two types of decision:-
  23. 23. Long range (capacity decisions) which cover a long time span and take into account the time value of money.
  24. 24. Short range or operating decisions cover a short span of time and time value of money is not considered to be significant.</li></li></ul><li>Cost For Decision Making<br /><ul><li>Relevant & Irrelevant Costs: cost which is influenced by a decision is a relevant cost and it is important for decision makers.
  25. 25. Example: cost of material and direct labor (variable cost) and fixed costs (for creating new facilities)
  26. 26. Cost which is not affected by a decision is irrelevant cost.
  27. 27. Incremental & Differential Costs: incremental costs are the additional costs which will be incurred if management chooses one course of action as opposed to another.</li></li></ul><li>Cost For Decision Making<br /><ul><li>A differential cost is a difference in cost between any two available, acceptable alternatives.
  28. 28. Example: difference in cost between buying and making of a component.
  29. 29. Opportunity & Imputed Costs: opportunity costs represent the benefits foregone by not choosing the second best alternative in favour of the best one.
  30. 30. Imputed costs are similar to the opportunity costs in that they are not recorded in the accounting books however they are hypothetical costs that must be taken into account if a correct decision is to be arrived at.
  31. 31. Example: Interest</li></li></ul><li>Thanks<br />