2. Costing is "the technique and process of ascertaining
costs". It means finding cost by any process or technique.
It consists of principles & rules which are used for
determining the cost of products manufactured or services
provided.
3. Cost accounting is defined as the process of determining
the cost of some particular products or services which
begins with the recording of income and expenditure and
ends with the preparation of periodical statements and
reports for ascertaining and controlling costs.
4. Cost accountancy has been defined as "the application
of costing and cost accounting principles, methods and
techniques to the science, art and practice of cost control
and the ascertainment of profitability.
5. Determination of selling price
Controlling cost
Providing information for decision-making
Ascertainment of cost & profit
Facilitates preparation of financial statements
Facilitates reliability
6. 1. Objective
2. Statutory Requirement
3. Control
4. Periodicity of reporting
5. Analysis of profit
6. Nature of transaction
7. Information
8. Fixation of selling price
9. Stock Valuation
7. 1. Helpful to management
2. Important for employees
3. Important for consumers
4. Helpful to creditors
5. Helpful in formulating business policies
6. Important for national development
7. Budgeting
8. Ensure best use of resources
9. Cost Audit
10. Enhances control
8. Lacks uniform procedure
Discrepancy in results shown by financial accounts &
cost accounts.
Installation of a cost accounting system is expensive
9. The literal meaning of cost is the amount paid or required in
payment for a purchase or for the production or upkeep of
something. It is the amount of resources given up in exchange
for some goods or services. Cost is generally measured in
monetary terms.
The term ‘cost’ does not mean the same thing under all
circumstances. Cost is always ascertained with reference to
some object such as material, labor, job, process etc.
10. Cost control: It is an act of controlling or regulating the cost
within the standards laid down, through the application of
various management tools & techniques such as standard
costing, budgetary control etc.
Cost reduction: It is concerned with achieving real &
permanent reduction on the unit cost of goods or services
rendered without impairing their quality or suitability.
11. Cost audit: It involves checking up the arithmetical accuracy
of cost accounts & verifying whether the principles laid down
have been followed or not.
Cost unit: It is unit of product, service or a combination of
them in relation to which costs are ascertained & expressed.
For e.g. in steel & cement industry cost unit is ‘tonne’ while in
transportation services the unit may be passenger-km, while
the former is the single unit cost the latter is composite unit i.e.
combination of two units.
12. Cost Centre: It is defined as a location, person or item of
equipment for which costs may be ascertained & used for the
purpose of control. It refers to a section of business to which
costs can be charged. A cost centre is charged with all the costs
that relate to it e.g. if cost centre is a machine, it will be
charged with the costs of installation, power, depreciation etc.
Cost Object: It may be defined anything for which the cost
can be measured separately. It may be a product, service,
activity or process etc.
13. Cost Driver: It is a factor that influences cost. A change in
the cost driver will led to a change in the total cost of a related
cost object. Examples of cost drivers are: number of units
produced, number of customers served, number of
advertisements, number of sales personnel, number of
products produced etc. Any change made in any of the cost
drivers will cause a change in the total cost.
14. It is the grouping of costs on the basis of their characteristics.
The different bases of cost classification are:
1) Classification by nature or elements: Material, Labour,
Expenses.
The substance from which the product is made is known as
material. It may be in a raw or manufactured state. It may be
direct material or indirect material.
15. Direct Material is that material which can be easily identified
and related with specific product, job, and process. Indirect
Material is that material which cannot be easily and
conveniently identified and related with a particular product,
job, process, and activity.
Labour: For conversion of raw material into finished goods,
human resource is needed, and such human resource is termed
as labour. There may be direct labour or indirect labour.
16. 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.
17. Costs that tend to be constant at different volumes of
output is called fixed costs. These costs do not have
any significant relation with the output. E.g., rent,
insurance charges, manager’s salary etc.
Costs that tend to vary with output & have a major
relation with output are termed as variable costs. e.g.,
wages of laborers, power cost of material etc.
18. Costs which neither vary proportionately nor remain
stationery are called as semi-variable or semi-fixed costs. E.g.
repairs, supervision charges, telephone rent, depreciation etc.
Costs which remain fixed over a certain range of activity &
then shifts to a new level as activity changes are termed as
step costs. These are taken as a type of semi-variable costs.
E.g., foremen supervising a given number of employees, if the
number of employees increases more foreman are required to
be appointed.
19. Costs that become part of the cost of the product are called as
product costs. E.g., direct material, direct labour etc.
Costs that are not traceable to the product & are treated as
expense in the period in which they are incurred. E.g., rent,
insurance, salaries etc.
20. Costs which can be easily traceable to a product,
service, job or process is called direct cost.
Expenses which are not directly chargeable to
production are called as indirect costs. E.g. salaries of
time-keepers, storekeepers etc.
21. Historical costs are computed after they are incurred. Such
costs are available only after the production or manufacturing
is over.
Predetermined costs are computed in advance of production
on the basis of factors influencing costs. Such costs may be
estimated costs & standard costs.
22. Costs which can be influenced by the action of a specified
member of an undertaking are called as controllable costs e.g.
direct material, direct labour etc.
Costs which cannot be influenced are termed as uncontrollable
costs e.g. rent, taxes, salary etc.
23. Opportunity cost: It is the cost of the next best alternative
foregone. It is the value of benefit sacrificed in favor of
choosing a particular action. For e.g. if an owned building is
proposed to be utilized for a new project, the likely revenue
that it could fetch if rented out is the opportunity cost which
should be considered while evaluating the profitability of the
project.
24. Sunk cost: These are the costs which have been created by a
decision made in the past & which could not be changed by
any decision that will be made in the future. Investments in
plant & machinery, amount spent on research & developments
are the examples of sunk costs.
Differential cost: The difference in total cost from selecting
one option over another is called differential cost.
25. Imputed or hypothetical cost: These are the cost which do
not involve cash outlay but are considered while making
decisions. E.g. interest on capital, rent of owned building.
Out-of-pocket cost: It is the cost which involves cash outlays
or requires the utilization of current resources. E.g. wages,
material cost, insurance etc. these are also known as explicit
costs. Costs which do not require any immediate cash outlay
are known as implicit costs. E.g. Depreciation on plant &
machinery.
26. Marginal cost: It is the additional cost of producing one
additional unit. Marginal costing is the technique of charging
only variable cost to products. It helps in decisions like make
or buy, pricing of product etc.
Relevant & irrelevant costs: Relevant costs are the future
costs that will differ depending upon the actions of the
management. Irrelevant costs are the costs that will not be
affected by the actions of the management.
27. Replacement costs- It is the current market cost of replacing
an asset. It is the cost at which an asset could be purchased
identical to one being replaced. The management has to
consider the replacement cost of an asset & not the price at
which the asset was purchased earlier.
Shut-down costs- Costs which continue to be incurred even
after a plant is temporarily shut down e.g. rent, depreciation
etc. These costs cannot be eliminated with the temporary
closure of the plant.
28. Avoidable and unavoidable cost: Avoidable costs are those,
which can be eliminated if a particular product or department,
with which they are directly related, is discontinued. For
example, salary of the clerks employed in particular
department can be eliminated, if the department is
discontinued. Unavoidable costs are those which cannot be
eliminated if a product or department is discontinued e.g. rent.
29. Costs that are expected to be incurred under normal operating
conditions at a given level of output are called normal costs.
These costs are the part of cost of production.
Costs which are not incurred under normal operating
conditions are called as abnormal costs e.g. fines, penalties
etc.
30. Production cost- It is the cost of operations commencing with
supply of material, labour, services & ends with packing of the
product. It includes total cost of raw material, labor,
production overheads etc.
Selling & distribution cost- It is the cost of creating,
stimulating the demand, securing orders & making the packed
product available for dispatch e.g. advertisement, showroom
expenses, warehouse cost, transportation cost, carriage
outward, cost of samples etc.
31. Development cost- It is the cost of process which begins with
the implementation of a decision to produce a new product or
to employ a new or improved method & ends with the
commencement of formal production of that product or
employment of that method.
32. Conversion costs: It is the cost of transforming direct
material into finished goods. It is the aggregate of direct labor,
direct material, and direct expenses.
Committed Costs: These are the fixed costs that arise as a
result of consequences of commitments previously made or
are incurred to maintain certain facilities and cannot be
quickly eliminated. The management has little or no
discretion in such type of costs e.g. rent, insurance,
depreciation on building or equipment purchased.
33. Discretionary Costs: These costs are not related to the
operation but can be controlled by the management. These
costs arise from some policy decisions, new researches etc.
and can be eliminated or reduced to a desirable level at the
discretion of the management. E.g. advertising costs, R&D
costs.
