Cost Concepts & Classification

Concept of cost

 It is the amount of expenditure incurred or

attributable to a given thing
 It is the measurement, in monetary terms, of the
amount of resources used for the purpose of
production of goods or rendering services.
 It means economic sacrifice, measured in terms of
standard monetary unit, incurred or potentially to be
incurred, as a consequence of a business decision to
achieve a specific objective
 Cost Vs. Expense and Loss

Expense:
 It is defined as an expired cost resulting from a productive
usage of an asset
 It is that portion of the revenue earning potential of an asset
which has been consumed in the generation of revenue
 Unexpired is recorded as an asset in the B/S
 Unexpired cost is converted into expense when it expires while
helping to earn revenue
 Eg. Depreciation of plant & machinery
Loss:
 It can be defined as the reduction in firm’s equity (other than
withdrawal)for which no compensation value has been
received
 It is an expired cost resulting from the decline in the service
potential of an asset that generated no benefit to the firm
 Eg. Obsolescence or destruction of stock by fire.
 Cost Centre and Cost Unit

It is defined as a section of business such as location,

person, or item of equipment (or a group of these)
for which costs may be ascertained and used for the
purpose of control.
 Types of cost centre

Personal
 Consists of a person or a group of persons
Impersonal
 Consists of a location or an item of equipment or group of
these
Production
 Where actual production work takes place. For e.g. welding
shop
Service
 Which render services to production. For e.g. stores
department, repair shop etc.
 Cost Unit

It is defined as a unit of product, service or time in

relation to which cost may be ascertained or
expressed.
It is the unit of measurement of cost.
Cost units may be of two types:
 Units of Production
 Units of Services
 Profit centre

A profit centre is a responsibility centre in which

inputs are measured in terms of expenses and
outputs are measured in terms of revenues.
It is a sub-division of an organisation in which
financial performance is measured on the basis of
profit
It is that segment of an organisation for which both
cost as well as profit are traced in monetary terms.
 Classification of cost

I. Direct and Indirect costs

II. Fixed , mixed and Variable costs
III. Committed and Discretionary costs
IV. Product costs and Period costs
V. Controllable and Non- controllable costs
VI. Historical and Pre-determined costs
VII. Normal and Abnormal costs
VIII.Relevant and Irrelevant costs
 Special costs for management decision making

Sunk costs
Differential (or Incremental)costs
Marginal costs
Imputed costs
Opportunity costs
Replacement cost
Future cost
Conversion costs