This document defines key cost concepts and classifications. It explains that cost is the monetary measure of resources used for production or services. Expenses are expired costs that helped generate revenue, while losses are expired costs with no benefit. Cost centers and cost units are defined as sections or units for which costs can be measured and used for control. Costs are classified in various ways such as direct/indirect, fixed/variable, and product/period costs to aid management decision making. Special costs like sunk, differential and marginal costs are also discussed.

1. Cost Concepts & Classification

2. Concept of cost
 It is the amount of expenditure incurred or
attributable to a given thing
 It is the measurement, in monetary terms, of the
amount of resources used for the purpose of
production of goods or rendering services.
 It means economic sacrifice, measured in terms of
standard monetary unit, incurred or potentially to be
incurred, as a consequence of a business decision to
achieve a specific objective

3. Cost Vs. Expense and Loss
 Expense:
 It is defined as an expired cost resulting from a productive
usage of an asset
 It is that portion of the revenue earning potential of an asset
which has been consumed in the generation of revenue
 Unexpired is recorded as an asset in the B/S
 Unexpired cost is converted into expense when it expires while
helping to earn revenue
 Eg. Depreciation of plant & machinery

4.  Loss:
 It can be defined as the reduction in firm’s equity (other than
withdrawal)for which no compensation value has been
received
 It is an expired cost resulting from the decline in the service
potential of an asset that generated no benefit to the firm
 Eg. Obsolescence or destruction of stock by fire.

5. Cost Centre and Cost Unit
 It is defined as a section of business such as location,
person, or item of equipment (or a group of these)
for which costs may be ascertained and used for the
purpose of control.

6. Types of cost centre
 Personal
 Consists of a person or a group of persons
 Impersonal
 Consists of a location or an item of equipment or group of
these
 Production
 Where actual production work takes place. For e.g. welding
shop
 Service
 Which render services to production. For e.g. stores
department, repair shop etc.

7. Cost Unit
 It is defined as a unit of product, service or time in
relation to which cost may be ascertained or
expressed.
 It is the unit of measurement of cost.
 Cost units may be of two types:
 Units of Production
 Units of Services

8. Profit centre
 A profit centre is a responsibility centre in which
inputs are measured in terms of expenses and
outputs are measured in terms of revenues.
 It is a sub-division of an organisation in which
financial performance is measured on the basis of
profit
 It is that segment of an organisation for which both
cost as well as profit are traced in monetary terms.

9. Classification of cost
I. Direct and Indirect costs
II. Fixed , mixed and Variable costs
III. Committed and Discretionary costs
IV. Product costs and Period costs
V. Controllable and Non- controllable costs
VI. Historical and Pre-determined costs
VII. Normal and Abnormal costs
VIII.Relevant and Irrelevant costs

10. Special costs for management decision making
 Sunk costs
 Differential (or Incremental)costs
 Marginal costs
 Imputed costs
 Opportunity costs
 Replacement cost
 Future cost
 Conversion costs