Cost and Management Accounting MBA III Sem
statement. here are so many
examples of expenses such as costs of goods sold expenses, selling expenses and administrative expenses.
-or expenses, there is no need to be paid in cash immediately, even a promise to pay could be made f or the
profits received. he manufacturing costs are capitali'ed in the form of finished goods inventory and when
a sale is incurred, they expire becoming expenses. he cost of unsold stoc$ which was an asset prior
now converts expenses of cost of goods sold as it has contributed to the generation of revenue. !anufacturing expenses may be expressed as cost because this is included in the cost of fished goods stoc$ which is an asset unless sale is made.
-or example, depreciation of a factory machine increases the utility of goods manufactured which are
therefore included in wor$&in&progress and finished goods inventory.
elling and administrative expenses, when not included in the cost of finished goods stoc$, are deemed only
as expenses, not cost asset0 and are deducted from revenues whenever obtained. imilarly, depreciation of
a factory building is a cost but depreciation of an office building is an expense.
he term cost itself is without any significant meaning and therefore, it is always advisable to use it with an ad)ective or phrase that will convey the meaning intended such as prime, direct, indirect, fixed, variable,
controllable, opportunity, imputed, sun$, differential, marginal, replacement and the li$e. -uture costs are
also considered in cost accounting but not in financial accounting.
o understand the concept of cost, the term *loss+ should be defined.
#oss is lost cost. It is applied to define two accounting events. In financial accounting, it is used to describe
a circumstance where expenses exceed revenues for an accounting period, that is, the reverse of net income
earnings0 for the accounting period. 1n the other hand, a loss arises due to the cost of an asset being more
than the sale proceeds when the asset is sold. his unfavorable event does not arise from a normal business
activity but from non&operating transactions or events. his meaning of loss is used to recogni'e the reverse
of gain. hat is, if no gain is achieved from the cost incurred or it becomes definite that no benefits accrue,
the cost becomes a lost cost, i.e., loss on sale of fixed asset, loss of stoc$
Cost can be defined as the expenditure actual or notional0 incurred on or attributable to a given thing. It can also be described as the resources that have been sacrificed or must be scarifies to attain a particular ob)ective. In other words, cost is the amount of resources used for something which must be measured in terms of money. -or example Cost of preparing one cup of tea is the amount incurred on the elements li$e material, labor and other expenses2 similarly