Wednesday, 6 June 2018

Concept of costs - elements of cost / classification of cost

Concept of costs

The cost of the (cost) is the sacrifice of resources committed for the benefit of the load (expense) is a fee charged (matched) with income (revenue) in a given accounting period.  Object Cost (Cost Object) is a unit or activity where the cost is accumulated and measured. Unit or activity it can be: the products, orders, departments, divisions, projects.

Concept of Costs

In order to understand the general concept of costs, it is important to know the following types of costs:
  1. Accounting costs and Economic costs
  2. Outlay costs and Opportunity costs
  3. Direct/Traceable costs and Indirect/Untraceable costs
  4. Incremental costs and Sunk costs
  5. Private costs and Social costs
  6. Fixed costs and Variable costs

Traceability of Cost to Cost Object produces:

  1. Direct Cost (direct costs)
  2. Indirect Cost (indirect costs)

Concept of Costs in terms of the Purpose

1. Incremental costs

These costs are incurred when the business makes a policy decision. For example, change of product line, acquisition of new customers, upgrade of machinery to increase output are incremental costs.

2. Sunk costs

Suck costs are costs which the entrepreneur has already incurred and he cannot recover them again now. These include money spent on advertising, conducting research, and acquiring machinery.

Classification of Costs

The Cost Of Fabrication/Manufacturing Cost classified in:

  • Direct Materials (Direct Materials).
  • Direct Labor (Direct Labor).
  • Factory Overhead (Factory Overhead) costs other than direct materials and direct labor.
  • The cost of Non-fabrication/Commercial Expenses classified in:
  • Marketing costs i.e. the costs required to obtain orders and provide products for customers
  • Administration costs i.e. the costs required to manage the Organization and provides support for employees
  • Prime Cost (The main Charge) is the amount of direct materials and direct labor
  • Conversion Cost (the cost of Conversion) is the number of direct labor and factory overhead

Production Volume classified in:

  • Variable costs i.e. the costs change proportionately in accordance with the volume of activity.
  • Fixed costs i.e. costs that do not change due to changes in the volume of activity in the relevant ranges
  • The cost of a mixture of cost components that have a variable and fixed
  • Department classified in:
  • Common Cost (shared Cost) i.e. the costs derived from the use of facilities or services by two or more departments.
  • Joint Cost (fees combined) i.e. costs that occur in the production process that result in two or more of the finished product.

Accounting Period classified in:

  • Capital Expenditure (capital expenditures) that costs incurred to benefit more than one accounting period.
  • Revenue Expenditure (income-Expenses) costs incurred to benefit in the same accounting period and are recorded as an expense.

Decision-making, implementation, and evaluation classified in:

Differential/Marginal/Incremental Cost i.e. change fees as a result of the selection of the alternative specific action. Opportunity Cost (opportunity cost) i.e. income/benefits are missing in certain selected alternative. Sunk Cost that is the cost that has been incurred and was not relevant to the decision
  • Avoidable and Unavoidable Cost
  • Controllable/Uncontrollable Cost

Costs can be classified in different ways. There are manufacturing costs and non-manufacturing costs, direct and indirect costs, product and period costs, controllable and uncontrollable costs, fixed and variable, etc.

Management accountants need to understand cost concepts because they are vital in many areas of planning, control, and decision-making. In this unit, we will learn about the different types of costs and product costing systems.

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