COST CONCEPT AND CLASSIFICATIONS

The Kind of cost concept to be used in particular situation depends on the Business Decisions to b made
Cost Consideration enters into almost every business Decisions, and it is important, though Sometimes difficult to use the right kind of cost

15 August 2013

Vidya Suresh

TYPES OF COST
ACTUAL COSTS:

It Means the actual expenditure Incurred for Acquiring or producing Good or service This is also known as Absolute cost or Outlay cost Example: Actual wages paid , Cost of materials Purchased
OPPORTUNITY COSTS:

It is a cost of Goods and Services is measured in terms of revenue Which could have been earned by employing that goods and services in some other alternative uses It is More Important and useful to managers in making a decision among the alternatives
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TYPES OF COST (contd)

INCREMENTAL COSTS :
Incremental cost is the additional cost due to a change in the level or nature of business activity It arises only when a change is contemplated in the existing business Example : Addition of new product line , adding a new machine

SUNK COSTS:
Sunk cost is one which is not affected or altered by and change in the level or nature of business activity It will remain the same whatever the level of activity Eg: Depreciation
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TYPES OF COST (contd)

PAST COSTS:
It is a actual cost incurred in the past and are generally Contained in the Financial accounts These cost can be merely observed and evaluated in retrospect FUTURE COSTS:

It is a cost that are actually expected to b occurred in some future period or periods Future cost only cost that matter for managerial decision because they are the only cost subject to managerial control

15 August 2013

Vidya Suresh

TYPES OF COST(cont..)
SHORT-RUN COSTS:
It is a cost that vary with the output when fixed plant and capital equipment remains the same. It becomes relevant when a firm decides whether or not to produce more in immediate future. In this case setting up a new plant is ruled out and the firm has to manage with the given plant. LONG-RUN COSTS: It is a cost which vary with output when all the input factors including plant and equipment vary. Long-run cost become relevant when the Firm has to decide whether to set up a new plant. It can be helpful both in initiation of new enterprises as well as the expansion of the existing one.
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TYPES OF COST(Contd.)
FIXED COSTS:
It is a cost that remains constant in total regardless to changes in the volume up to certain level of output. They are not affected by changes in the volume of production. They will have to be incurred even when output is nil.

VARIABLE COSTS:
Variable costs are expenses that change in proportion to the activity of a business. Variable costs are sometimes called unit-level costs as they vary with the number of units produced.

15 August 2013

Vidya Suresh

TYPES OF COST(Contd.)
DIRECT COSTS:
A direct or traceable cost is one which can be identified easily and indisputably with a unit of operation. For ex: the salary of a divisional manager, when division is a costing unit.

INDIRECT COSTS:
Common or indirect costs are those that are not traceable to any plant, department or operation, or to any individual final product. For ex: the salary of the general manager, when one of the divisions is a costing unit.

15 August 2013

Vidya Suresh

TYPES OF COST(Contd.)
COMMON PRODUCTION COSTS:
In some manufacturing enterprises two or more products emerge from a single , common production process and a single raw material. Ex: Petroleum products refined from crude oil They are identifiable as separate products only at the conclusion of common processing, generally known as the split- off point. The costs incurred up to this point are common costs which cannot be traced to be separate products in any direct or logical manner.

15 August 2013

Vidya Suresh

TYPES OF COST(Contd.)
JOINT COSTS:
When an increase in the production of one product causes an increase in the output of another product, then the products and their costs are traditionally defined as Joint products and Joint costs respectively. Ex: When gas is produced from coal, coke and other products are also emerged.

15 August 2013

Vidya Suresh

TYPES OF COST(Contd.)
SUNK COSTS:
A past cost resulting from a decision which can no more be revised is called a sunk costs. Sunk cost is a cost once incurred cannot be retrieved. Ex: Brewery plant in times of prohibition.

SHUT DOWN COSTS:

Costs which would be incurred in the event of suspension of the plant operation and which would be saved if the operations are continued. Ex: Costs of sheltering the plant and equipment, re-employment of workers.

15 August 2013

Vidya Suresh

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TYPES OF COST(Contd.)
ABANDONMENT COSTS:
Costs of retiring altogether a plant from service. Abandonment arises when there is a complete cessation of activities and creates a problem as to the disposal of assets. Ex: Costs involved in the discontinuance of tram services in Mumbai.

URGENT COSTS:
Costs which must be incurred in order to continue the operations of the firm. Ex: Costs of material and labour.

15 August 2013

Vidya Suresh

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TYPES OF COST(Contd.)
POSTPONABLE COSTS:
Costs which can be postponed at least for some time Ex: Maintenance relating to building and machinery

OUT-OF-POCKET COSTS:
Costs that involve current cash payments to outsiders. Ex: Salaries paid to administrative staff.

15 August 2013

Vidya Suresh

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TYPES OF COST(Contd.)
BOOK COSTS:
Costs that does not require current cash payments. Ex: Depreciation.

ESCAPABLE COSTS:
Costs which can be reduced due to a contraction in the activities of business enterprise.

15 August 2013

Vidya Suresh

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TYPES OF COST(Contd.)
HISTORICAL COSTS:
Cost of a plant at a price originally paid for it.

REPLACEMENT COSTS:
Cost that have to be paid currently for acquiring the same plant.

15 August 2013

Vidya Suresh

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TYPES OF COST(Contd.)
CONTROLLABLE COSTS:
The controllability of cost depends upon the levels of responsibility under consideration. It may be defined as the cost as the one which is reasonably subject to regulation by the executive with whose responsibility the cost is being identified.

15 August 2013

Vidya Suresh

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TYPES OF COST(Contd.)
AVERAGE COSTS:
Total cost divided by total quantity produced.

MARGINAL COSTS:
Extra cost of producing one additional unit.

15 August 2013

Vidya Suresh

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