Cost concepts

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Cost concepts

  1. 1. COST CONCEPTS<br />BY<br />EP JOHN<br />11397044<br />
  2. 2. COST CONCEPTS<br />SELECTION BETWEEN ALTERNATIVES<br />DEPENDS ON BUSINESS DECISIONS<br />IMPORTANAT TO USE RIGHT ANALYSIS OF COST<br />THE COST ESTIMATES BY CONVENTIONAL FINANCIAL ACCOUNTING ARE NOT APPROPRITE FOR ALL MANAGERIAL USES.<br />DIFFERENT BUSINESS PROBLEMS CALL FOR DIFFERENT KINDS OF COSTS.<br />
  3. 3. TYPES OF COSTS<br />FUTURE AND PAST COSTS<br />INCREMENTAL AND SUNK COSTS<br />OUT-OF-POCKET AND BOOK COSTS (ac)<br />HISTORICAL AND REPLACEMENT COSTS<br />EXPLICIT AND IMPLICIT COSTS(ac)<br />ACTUAL AND OPPURTUNITY COSTS (ac)<br />DIRECT AND INDIRECT COSTS<br />SHUT DOWN AND ABANDONMENT COSTS<br />PRIVATE AND SOCIAL COSTS<br />
  4. 4. FUTURE AND PAST COSTS<br />FUTURE COSTS ARE THE ESTIMATES OF TIME ADJUSTED PAST OR PRESENT COSTS AND ARE REASONABLY EXPEECTED TO BE INCURRED IN SOME FURTURE PERIOD OR PERIODS.<br />
  5. 5. FUTURE AND PAST COSTS<br />PAST COSTS ARE ACTUAL COSTS INCURRED IN THE PAST AND THEY ARE ALWAYS CONTAINED IN THE INCOME STATEMENTS.<br />RECORD KEEPING ACTIVITY.<br />
  6. 6. INCREMENTAL AND SUNK COSTS<br />INCREMENTAL COSTS ARE DEFINED AS THE CHANGE IN OVERALL COSTS THAT RESULT FROM PARTICULAR DECISIONS BEING MADE<br />
  7. 7. INCREMENTAL AND SUNK COSTS<br />SUNK COST IS THE ONE NOT AFFECTED OR ALTERED BY A CHANGE IN THE LEVEL OR NATURE OF BUSINESS ACTIVITY.<br />
  8. 8. OUT-OF-POCKET AND BOOK COSTS<br />OUT-OF-POCKET COSTS INVOLVE IMMEDIATE PAYMENTS TO OUTSIDERS.<br />WAGES AND SALARIES<br />
  9. 9. OUT-OF-POCKET AND BOOK COSTS<br />IF OUT-OF-POCKET COSTS NOT PAID IT BECOMES BOOK COST. THIS CAN BE CONVERTED INTO OUT-OF-POCKET COST BY SELLING ASSETS AND LEASING THEM BACK FROM THE BUYER.<br />
  10. 10. HISTORICAL AND REPLACEMENT COSTS<br />HISTORICAL COST STATES THE COST OF PLANT, EQUIPMENT AND MATERIALS AT THE PRICE ORIGINALLY PAID FOR THEM.<br />
  11. 11. HISTORICAL AND REPLACEMENT COSTS<br />REPLACEMENT COST MEANS THE PRICE THAT WOULD HAVE TO BE PAID CURRENTLY FOR ACQUIRING THE SAME PLANT.<br />
  12. 12. EXPLICIT AND IMPLICIT COSTS<br />EXPLICIT COSTS ARE THOSE EXPENSES THAT ARE ACTUALLY PAID BY THE FIRM (PAID-OUT-COSTS). THEY ARE GENERALLY RECORDED IN BOOKS OF ACCOUNT.<br />
  13. 13. EXPLICIT AND IMPLICIT COSTS<br />IMPLICIT COSTS ARE THEOROTICAL EXPENSES IN THE SENSE THAT THEY GO UNRECOGNISED BY THE ACCOUNTING SYSTEM. MAY BE DEFINED AS THE EARNINGS OF THOSE EMPLOYED RESOURCES THAT BELONG TO THE OWNER HIMSELF <br />
  14. 14. ACTUAL AND OPPURTUNITY COSTS<br />THE ACTUAL EXPENDITURE INCURRED FOR<br />ACQUIRING OR PRODUCING A GOOD <br />OR SERVICE. THESE COSTS ARE GENERALLY RECORED IN THE BOOK OF ACCOUNTS. <br />
  15. 15. ACTUAL AND OPPURTUNITY COSTS<br />THE OPPURTUNITY OR ALTERNATIVE COST <br />ARE THE RETURNS FROM SECOND BEST<br />USE OF THE FIRM’S RESOURCES WHICH THE FRIM FORGOES IN ORDER TO AVAIL ITSELFOF THE RETURNS FROM THE BEST USE OF THE RESOURCES. <br />
  16. 16. DIRECT AND INDIRECT COSTS<br />COST THAT CAN BE DIRECTLY ATTRIBUTED<br />TO THE PRODUCTION OF A UNIT <br />OF A GIVEN PRODUCT. <br />THIS CAN BE EASILY <br />SEPARATED, ASCERTAINED AND <br />IMPUTED TO A UNIT OF OUTPUT.<br />
  17. 17. DIRECT AND INDIRECT COSTS<br />COSTS THAT CANNOT BE SEPARATED<br />AND CLEARLY ATTRIBUTED TO INDIVIDUAL<br />UNITS OF PRODUCTION<br />LIKE ELECTRICITY CHARGES<br />
  18. 18. SHUT DOWN AND ABANDONMENT COSTS<br />SHUT-DOWN COSTS ARE REQUIRED TO <br />BE INCURRED WHEN THE PRODUCTION<br />OPERATIONS ARE SUSPENDED AND WILL NOT<br />BE NECESSARY, IF THE PRODUCTION<br />OPERATIONS CONTINUE.<br />IF THE PRODUCTION IS SUSPENEDED,<br />THE PLANT, MACHINERY OR EQUIPMENT<br />WILL HAVE TO BE PROTECTED BY PUTTING UP <br />SHEDS, USING TARPAULIN, PLASTIC SHEETS ETC.<br />
  19. 19. SHUT DOWN AND ABANDONMENT COSTS<br />WHEN ANY PLANT IS TO BE <br />PERMANENTLY CLOSED DOWN,<br />SOME COSTS ARE TO BE INCURRED<br />FOR DISPOSING OFF THE FIXED ASSETS<br />
  20. 20. PRIVATE AND SOCIAL COSTS<br />THE MICRO LEVEL ECONOMIC COSTS. <br />IF THE DECISION OF A FIRM TO EXPAND <br />ITS OUTPUT LEADS TO INCREASE IN ITS COST, <br />IT IS PRIVATE COST<br />ARE THOSE WHICH ARE ACTUALLY INCURRED <br />OR PROVIDED FOR <br />BY AN INDIVIDUAL OR FIRM <br />FOR ITS BUSINESS ACTIVITY.<br />
  21. 21. PRIVATE AND SOCIAL COSTS<br />THE MACRO LEVEL ECONOMIC COSTS. <br />IF IT LEADS TO CERTAIN COSTS TO THE SOCIETY, <br />MAY BE IN THE NATURE OF <br />GREATER POLLUTION, CONGESTION ETC<br />SOCIAL COST IS THE TOTAL COST TO THE SOCIETY ON<br />ACCOUNT OF PRODUCTION OF A GOOD.<br />
  22. 22. THANK- U<br />

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