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What is Cost Concepts and Different Terms of Costs

What is Cost Concepts and Different Terms of Costs:

What is Cost Concepts and Different Terms of Costs

What is Cost Concepts and Different Terms of Costs

What is Cost Concepts and Different Terms of Costs – There are widely recognized cost concepts and terms which are often used in cost accounting.

Give below are definitions of important cost concepts and terms:

1.What is Controllable Costs- These are costs which can be influenced by the action of a specified person in an organization. In every organization, there are a number of departments which are called responsibility centers. each under the charge of a specified level of management.

Costs incurred in these responsibility centers are influenced by the action of the in charge of the particular responsibility center. Thus, any cost that an organizational unit has the authority to incur may be identified as controllable cost.

2.What is Uncontrollable Costs – These are the costs which can not be influenced by the action of a specified authority. Generally fixed costs are beyond the influence of departmental heads, these are decided by the top management. All allocated costs fall in this category.

It may be noted that controllable and uncontrollable cost concepts are related to the authority of a person in the organization. An expenditure which may be uncontrollable by one person may be controllable by another.

Moreover, in the long run all costs may be controllable.

3. What is Development Costs – Based on research, the management may decided to undertake the production of a new product or employ new or improved methods of production. The cost incurred in putting the results of such research into use on commercial basis are called development costs.

4.What is Direct and Indirect Costs – Those costs which are directly identifiable with a particular product. service. job. or activity are direct costs Besides the cost of direct material and direct labor, all direct expenses such as hire charges of a special machine commissioned for a specific job.

which can be identified with a given product. service, job or activity also form part of direct costs. These are also called traceable costs. On the other hand, indirect costs are those which cannot be readily identified with products or Services but are generally incurred in carrying out production activity.

Example of indirect costs are: wages of foreman, machinery up-keep and other items of factory overheads.

5. What is Imputed Cost and Opportunity Costs – Imputed costs are notional costs and do not involve any cash outlay These costs are also computed and A considered only for decision-making purpose. Imputed costs are similar to opportunity costs.

Interest on capital. the payment for which is not actually made is an example of imputed costs.

On the other hand opportunity cost refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action For example, a firm accepts an expansion plan and for its financing in withdraws money from its bank deposits.

Then the loss of interest on the bank deposits is the opportunity cost for carrying out the expansion plan Opportunity costs play an important role in managerial decision-making processes, although they are not recorded in the books of accounts.

6. What is Out-of-pocket Costs – This is that portion of total cost which involves cash outlay as against those costs which do not require any cash outlay, such as depreciation.

This cost concept is a short-term concept and is used in decisions relating to fixation of selling price in recession, make or but. etc. Out-of-pocket costs can be avoided or saved if a particular proposal under consideration is not accepted.

7. What is Period Costs – Period costs are not assigned to the product but are charged as expenses against the revenue of the period in which incurred all non-manufacturing costs such as general and administrative expenses. selling and distribution expenses are recognized as period costs.

In the case of marginal costing, even fixed factory overheads are classified as period costs but under absorption they are treated as product costs.

8. What is Overhead Expenses – These are the expenses. which can not be charged directly to a job. product. process. cost unit or cost center. These expenses are apportioned to relevant cost units or costs centers on some equitable basis.

Rent of the factory, wages of the watchman. Salary of the works managers, etc. are example of overhead expenses. All indirect costs arc ultimately charged to the product by the process of absorption.

9. What is Marginal Cost – This represent the increase or decrease in total cost which occur with a small change in outpour say, a unit of output. In cost accounting variable costs represent marginal cost. This cost concept is of great relevance in decision-making.

10. What is Policy Cost – These are cost which are incurred by any business enterprise as a matter of policy. Research and development costs are generally policy costs.

11. What is postponable Costs – These are the costs which can be shifted to a future period with little no effect on the efficiency of current operations.

12. What is Pre-production Costs – The part of development costs incurred in making a trial production before commencing formal production is termed as pre-production cost.

13. What is Relevant Costs – These are costs which are pertinent to a decision. In taking a decision, all costs are not relevant. For example, in a decision relating to the replacement of an old machine, the written down value of the existing machine is not relevant but its sale price is relevant.

14. What is Replacement Costs – This is the current cost which is to be incurred for replacing an existing item of property or any other asset. For example, the cost of an asset purchased earlier amounted to Rs. 5,000 but today if the same asset is to be replaced with almost the same type of a new asset for Rs. 6,000 then the replacement cost will be Rs, 6,000.

Very often the management has to consider the current market price and not the actual cost incurred earlier of an inventory or any other asset to be used in the production of a given product while quoting its price.

15. What is Research Costs – There are costs incurred on the discovery of new or improved products, processes, methods of production, etc.

16. What is Variable and Semi-variable Costs – A cost which tends to vary directly with the volume of output is called variable cost. Total variable cost increases in proportion to output. However, it remains constant per unit.

The costs of direct materials, direct labor, etc. are example of variable cost. On the other hand, semi-variable cost is that which is partly variable. This is a cost which changes with the change in volume of production but not proportionately.

Examples are depreciation, repairs and maintenance, etc.

17. What is Residual Costs – These costs can not be allocated or apportionment to a particular department cost center or product. An example is the fee paid to a consultant for advising on the replacement of and old machine.

18. What is Shut-down Cost – Shut-down costs are those which continue to be incurred even when a plant is temporarily shut-down. e.g.. rent. rates. depreciation, salaries of staff, etc. These costs cannot be eliminated with the closure of the plant.

19. What is Sunk Costs – Thus is historical cost incurred in the past. It plays no role in decisions-making in the current period. For example, in the case of a decision relating to the replacement of a machine, the written down value of the existing machine is a sunk cost and therefore, not considered.

20. What is Urgent Costs – These are those costs which are to be incurred immediately, failing which the production line may be held up. Delaying incurrence of these costs will have an obviously adverse effect on the efficiency of operations in hand. These are absolutely essential, generally leaving no room for discretion. For example, there is a sudden breakdown requiring an immediate replacement of a part. The cost incurred on such replacement may be identified as an urgent cost.

These are all definitions of important cost concepts and terms.

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