COSTING \u2013 THEORY NOTES
2.Determination of selling price: Selling price is influenced by a number of factors. However prices cannot be fixed below cost save in exceptional circumstances. Hence cost accounting is required for determination of proper selling price.
4.Ascertaining the profit of each activity: Profit of each department / activity / product can be determined by comparing its revenue with appropriate cost. Hence Cost Accounting ensures profit measurement on an objective basis.
5.Assisting management in decision-making: Business decisions are taken after conducting Cost-Benefit Analysis. Hence Cost and benefits of various options are analysed and the Manager chooses the least cost option. Thus Cost Accounting and reporting system assists managers in their decision making process.
1.Variable Costs: These are costs which tend to vary or change in relation to volume of production or level of activity. These costs increase as production increases and vice- versa e.g. cost of raw material, direct wages etc. However, variable costs per unit are generally constant for every unit of the additional output.
2.Fixed Costs: The cost which remain fixed irrespective of the change in the level of activity / output. These costs are not affected by volume of production e.g. Factory Rent, Insurance etc. Fixed Costs per unit vary inversely with volume of production i.e. if production increases, fixed costs per unit decreases and vice-versa. Sometimes, these are also known as Capacity Costs or Period Cost.
Plant, building and equipment (e.g. depreciation rent, taxes insurance premium etc.) or
It arises from periodic (usually yearly) decisions regarding the maximum outlay to be incurred, and
These costs remain unaffected by any short-term changes in the volume of production.
Any reduction in committed fixed costs under normal activities of the concern would have adverse repercussions on the concern\u2019s long term objectives.
Discretionary fixed Cost can change from year to year, without disturbing the long-term objectives.
3.Semi-variable Costs: These are those costs which are party fixed and partly variable. These are fixed upto a particular volume of production and become variable thereafter for the next level of production. Hence, they are also called Step Costs. Some examples are Repairs and Maintenance, Electricity, Telephone etc.
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