Cost concepts

 Cost : The amount of resources given up

in exchange for some goods or services.
Cost is that which is given or is sacrificed
to obtain something.
*Expenses: Expenses are costs which have
been applied against revenue of particular
accounting period in accordance with the
principle of matching cost to revenue.
*Loss: It represents diminution in ownership
equity other than from withdrawal of
capital for which no compensating value
has been received.
*Cost center: A cost center is a smallest
segment of activity or area or
responsibility for which costs are
accumulated.
 Types of cost centers.
i) Personal( for human) and impersonal
cost centers ( assets)
ii) Operation and process cost centers
iii) Product and service cost centers
 Profit center : A profit center is that segment of
activity of a business which is responsible for
both revenue and expenses and discloses the
profit of a particular segment of activity.
 Cost driver: A cost driver is any factor that
influences costs. Eg. Number of units produced,
number of setups, number of items distributed,
number of customers served, number of
advertisements etc.
 Conversion cost is the sum of direct wages, direct
expenses and manufacturing overhead costs of
converting raw material from one stage of
production to the next.
 Contribution margin: This is the excess of sales
prices over variable costs. This can be
expressed in total or ratio of sales or percentage
of sales.
 Carrying cost:
 Out of stock cost:
 Ordering cost;
 Development cost:
 Policy cost: incurred in accordance with the
policy of an undertaking
 Discretionary cost: managed cost or
programmed costs, include fixed costs that arise
from periodic appropriate decision that directly
reflect top management policies
 Idle facilities cost: abnormal idleness of
fixed assets or available services
 Expired cost: cost which is related to the
current period as an expense or loss
 Incremental revenue: reflects the
differences in revenue between two
alternatives
Cost classification
 By nature or elements
eg.Materials, labor and expenses
material into raw material, components
spare parts etc.
 By functions: eg.production, administration,
selling and distribution
 By degree of traceability to the product

--direct and indirect

 According to planning and control:-
budgeted costs, standard costs
 By association with the product
 For managerial decisions- marginal cost,
opportunity cost
 By changes in activity or volume– fixed, variable,
semi variable costs
 By controllability
 By normality—normal cost and abnormal cost
 By relationship with accounting period—capital
and revenue
 By time- historical and predetermined costs