Nothing in life is certain except death and taxes.

--Benjamin Franklin

ost oncepts
Dr Amit Kumar Sinha dramitksinha@gmail.com

Introduction
 Different

cost concepts and terms are often used in accounting reports.  Managers who understand these concepts and terms are able to... best use the information provided, and avoid misuse of that information.
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Cost
 Cost

is a resource sacrificed or forgone to achieve a specific objective.  It is usually measured as the monetary amount that must be paid to acquire goods and services.  An actual cost is the cost incurred (a historical cost) as distinguished from budgeted costs.
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Cost Object
A

cost object is anything for which a separate measurement of costs is desired.

Product Service Project Brand Activity Department

Cost Accumulation - Assignment

are two basic stages of accounting for costs: 1 Cost accumulation 2 Cost assignment to various cost objects
There
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Cost Accumulation - Assignment

Cost Object Cost Accumulation Cost Object

Cost Object Cost Assignment

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Cost Accumulation - Assignment

 Cost

accumulation is the collection of cost data in some organized way by means of an accounting system.  Cost assignment is a general term that encompasses... tracing accumulated costs to a cost object, allocating accumulated costs to a cost 7 object.

Classification of Cost Concepts

C S C N ET OT OCPS
DSR T ET ECIPIV
T cb C Spra ilityC Cmu tio C rae ility ea b o pta n Fntio C uc n

SAISICLT TT T A
Ae g C vra e GuC rop

BHV U T CNET A T E AIOR OCPUL

Vria ilityC ab Oprtuity po n

Dc iret Iniret dc

Spra e a te Cm o o mn J in ot B-p dc y rout

Htoicl is r a

Mnfatu g a u c rin

Tta ol

P e rim Cne io ovrs n

Fe ixd Vria le ab Sm ixd e i-F e Sm aia le e i-Vr b

Mrg a a inl Sn uk Prio ed

Rp cmn O e& d in Ae g o Uit e lae e t ffic Am vra e r n S na ta drd Sle & is a s Dt

Descriptive Terms Tracebility Criterion Direct Costs

 Direct

costs of a cost object are those that are related to a given cost object (product, department, etc.) and that can be traced to it in an economically feasible way.  Cost-Tracing describes the assignment of direct costs to the particular cost object.

Descriptive Terms Tracebility Criterion Indirect Costs

IDC are related to the particular cost object but cannot be traced to it in an economically feasible way.

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Direct & Indirect Costs

 Several

factors affect the classification of a cost as direct or indirect: The materiality of the cost in question Available information-gathering technology Design of operations Contractual arrangements  The direct/indirect classification depends on the choice of the cost object.

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Descriptive Terms Separability Criterion

Separate

Cost

which can be traced to each particular unit of batch of production

Common Cost

which are common for 2 or more products / product lines which can be produced separately
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Descriptive Terms Separability Criterion

 Joint

Cost

which are incurred in producing products which must necessarily be produced together
 By-Product

Cost

is variation of Joint Cost BP & JP cost depends upon significance and importance
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Descriptive Terms Computation Criterion Historical Cost

is on past figures
Replacement

Cost or Budgeted
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is present replacement value

Standard Cost

is based on standards

Descriptive Terms Function Criterion

 Manufacturing Cost

is total of consumption of raw materials, direct labour and manufacturing overheads

 Selling

& Distribution Cost

is cost incurred to sell & distribute

 Administrative Cost

is incurred in office administration

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Statistical Terms Average Criterion

Total Unit

Cost

sum total of all costs

Cost
Hours worked Packages delivered No. of units assembled

is Total Cost divided by number of units produced

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Statistical Terms Grouping Criterion

 Prime

Cost

total of Cost of RM consumed & Direct Labour Here Cost of RM consumed = Op. Stock RM + Purchases RM Closing Stock RM
 Conversion

Cost
DL PC MOH CC

total of Direct Labour and Manufacturing OH RM

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Behavioural Terms Variability Criterion

 Fixed

Cost

which do not vary with cost object/no. of units produced

 Variable

Cost

which varies with no. of units produced

 Semi-Fixed  Semi-Variable

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Conceptual Terms
Marginal Sunk

Cost

is cost of producing one more unit

Cost

is cost which cannot be recovered even if the course of action is not made
Period

Cost
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is for a particular period

Cost Drivers
A

cost driver is a factor, such as the level of activity or volume, that causally affects costs (over a given time span). The cost driver of variable costs is the level of activity or volume whose change causes the (variable) costs to change proportionately.

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Relationships of Types of Costs

Direct

Variable

Fixed

Indirect
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anufacturing
Manufacturing-sector companies

purchase materials and components and convert them into finished goods. A manufacturing company must also develop, design, market, and distribute its products.
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Trading
Trading-sector companies

purchase and then sell tangible products without changing their basic form.

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Service Companies
provide services or intangible products to their customers. Labour is the most significant cost category.

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COST OF GOODS MANUFACTURED

COST OF RM CONSUMED + DIRECT MANUFACTURING LABOR COSTS PRIME COST => + INDIRECT MANUFACTURING COSTS FACTORY COST => + OP. STOCK WIP - CL. STOCK WIP COST OF GOODS MANUFACTURED => 25

COST OF GOODS SOLD (COGS)

OP. STOCK FG +COGM - CL. STOCK FG COST OF GOOD SOLD =>

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INCOME STATEMENT

REVENUES (SALES) - COGS GROSS PROFIT/MARGIN - Sales & Dist. Cost OPERATING INCOME
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IMPACTS

BALANCE

SHEET PROFIT & LOSS ACCOUNT

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Cost means sacrifice

Thank You
Dr Amit Kumar Sinha dramitksinha@gmail.com

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