1.1.2 Cost Concepts
Cost is the amount of resources spent given up in exchange for something and is expressed in monetary terms. In general ‘cost’ means “the amount of expenditure incurred or attributable to a given thing”. The expenditure incurred may be actual or notional.
Cost is defined differently by economists, cost accountants and others. Some of the definitions of cost are given below:
• Cost is “The amount of expenditure (actual or notional) incurred or attributable to a given thing” - CIMA, UK
• “Cost is a measurement, in monetary terms of the amount of resources used for the purpose of production of goods or rendering services” - Cost Accounting Standards of ICWA of India
• “A cost is the value of economic resources used as a result
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In this type of cost centre, cost is analysed and related to series of operation in a sequence. For example, In chemical industries: Steel rolling, Refineries, etc.,
• Operation cost centre: The machines or persons which carry out similar operations are represented by operation cost centre. This will ascertain the cost of each operation inside the factory irrespective of its location.
Cost Unit:
A cost unit can be defined as a unit of measurement to ascertain the cost of products and services. Cost units are selected to express cost per unit. They are measured based on the nature of products and business. There are generally two types of cost units, which are explained as follows:
1. Unit of production: It is mainly applied in manufacturing industries. For example, a tonne of aluminium or a gram of silver, etc.
2. Unit of service: It is applied in service industries. For example, per table, per day, etc.
Some of the examples of how cost unit is used for different products and services are listed below. We measure them as:
Bricks Per 1000 bricks made
Collieries Per ton of coal raised
Printing Per 1000 impressions
Ship-building Per
[4] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 3, Cost Assignment, p. 54-59
2. Increase accuracy in the product cost calculating. While using ABC, direct materials and direct labors can be classified into products, manufacturing overhead will be classified into the homogeneous cost pool. Then, apportioned the manufacturing overhead into products according to reasonable distribution cost standard. The standard of cost allocation becomes more direct and specific, leading to many traditional uncontrollable indirect cost changes into controllable direct cost. And this provides more accurate information to cost control.
Cost-plus pricing, it the industry pricing standard, and is a method to determine a price of the product by finding the cost per unit and then including a mark-up
The costing system is a system that is used throughout businesses that offer a service. “A standard costing system uses standard costs and quantities of all three types of manufacturing costs: direct materials, direct labor, and factory overhead” (Blocher 2016 p. 97). Companies utilize the costing system to monitor the actual product usage compared to prior usage. Contractor use this system when bidding on jobs; once they collect specific instruction for the requested job they factor in the amount of material, labor, and other overhead costs then provide a quote for the assignment. “Strategic cost management is deliberate decision-making aimed at aligning the firm's cost structure” (Anderson & Sedatole 2003). Red Lobster and Kroger are examples
Overhead based on units sold includes only sales and marketing. Sales and marketing will be targeted mostly towards the products that are already on the market, and so units sold is the best way to associate the cost with each product. (Figure A)
Operations Management Process is the central arteries within the organization because it produces the planning process for goods and services, which are its reason for existent. Operations management is linked to all organizations as every organization is producing either a product or a service. However, it cannot be said to be the most important function since there are other functional areas and boundaries within an organization. In today's fast changing world, organizations have to have a tendency towards being efficient, effective and innovative to the changing environment to succeed. Operations Management has to use metrics in order for them to accomplish their task and be successful with minimal interruptions within the organization.
Without a financial cost accounting system in place, the HCO puts itself at great risk for errors and miscommunication. A cost accounting system is a system for recording, analyzing, and allocating cost to the individual services provided to patients” (Imus 1). Likewise, a cost accounting system is comprised of many different aspects that establish a stable financial budget model and forecast.
"College Accounting Coach." Process Costing-Definitions And Features(Part1) « Process Costing « Cost Accounting «. Feb. 2007. Web
Cost allocation is the process of identifying, aggregating, and assigning of cost to various separate activities. There is no overly precise method of charging cost to objects, hence resulting to approximate methods being used to do so. Amongst the approximation basis used includes square footage, headcount, cost of assets employed, and electricity usage amongst others. The main aim of cost allocation is to spread cost in the fairest possible method and also to impact the behavior pattern of the cost.
According to Heisinger and Hoyle (2012), job costing is used to record all the incomes and expenses relating to that special product, the unit cost information is derived from the job cost sheet and it involves only one work-in-process inventory account. It is also used for small production jobs, entails detailed record keeping due to the fact that time and materials used for a particular job must be charged directly to the job and the record kept might be used as billing to customers. On the other hand, process costing system is the approach used to
As we see that process costing only concentrates on what happens in the departments, unit cost information in this type of cost comes directly from the department accounting office, while in job costing the unit cost information is derived from the job cost sheet (Walther, L. M. & Skousen, C.J.
Cost accounting system has two types, job order costing, and process cost system. These two cost systems are very different, almost every company uses order costing or process costing. Starbucks, is a coffee shop where citizens congregate to drink there morning coffee, study, and or socialize. Starbucks is one of the oldest and largest privately held specialty coffee retailer in the United States. (Starbucks) Their passion is to discover the flavors you love and always bring it home, delivering the look, taste and aroma of the world’s best coffee and teas. Job order costing is a very easy way in order to help Starbucks managers to know how much profit their company (Starbucks) made.
These costs are not straightforwardly associated to a project. Examples include organization costs such as advertising or accounting. G&A costs are generally billed as a percent of total costs, or items such as labor, materials, or equipment. Using the sums of direct and overhead costs for work packages, it is possible to cumulate the costs for any deliverable for the entire project (Gray & Larson, 2005).
form of matter alongwith an idea and a purpose. Most often, the actual cost of
Therefore, job order costing system is a widely used costing system in manufacturing as well as service operations. Moreover, when companies employ and accept orders or jobs for varying products, the assignment of cost to products becomes a strenuous task. Job order costing systems can be utilized in many aspects and entities in production of product offerings. An example of a situation in which you would use job order cost information is in an industry such as the building construction industry since each building is unique. Job-order costing systems need an average overhead rated based on a common measure of production, which includes labor hours, machine hours, or square footage (Edmonds, Tsay, & Olds, 2011).