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
Activity-based costing (ABC) is a costing method that is usually used as a supplement to a company’s usual costing system, and is therefore used for internal decision-making. It is designed to inform managers of costing information for decisions (strategic and others) that potentially affect capacity and consequently “fixed” as well as variable costs. In addition, ABC can also be used to pinpoint activities that would benefit from process improvements.
material; work that is in progress, a finished goods inventory and the cost of goods sold.
A variable cost is a cost that changes in relation to deviations. In the diabetes clinic I am creating, depending on the volume of patients, items include needles, cotton balls, disinfectant, urine specimen cups and lab equipment related to diabetic blood and urine testing would be considered variable costs. Other equipment includes eye examination tools, scales and blood pressure cuffs. To reduce variable costs, I will not purchase inventory we do
[4] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 3, Cost Assignment, p. 54-59
For instant, current cost for inventories is the current acquisition price of the merchandise or the current cost to produce it. The first systematic presentation of current cost accounting was presented in 1961, ‘The Theory and Measurement of Business Income’. (Edwards & Bell, 1961)
Most of the uncontrollable cost items (e.g., charges to other network operators, or purchases of energy) were eliminated from the cost base and the level of remaining uncontrollable costs was minimal. The costs associated with the performance of transmission activities were removed from the analysis.
In the example above 6000 bikes were fully completed. However, in the real world not all units will be fully completed at the end of an accounting period, some will only be partially completed. Equivalent units of production will look at how to convert these partially completed units into completed units for accounting purposes. Equivalent unit calculations are used at the end of a month, to prepare monthly production reports. They are also used at the end of the year to determine ending inventory values.
costs by multiplying the unit cost of each service. It’s difficult to estimate the cost of
Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.
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.
For example: with the increase of the number of products produced, the cost of operating a machine also increase. Second we have batch level costs which is associated with batches; producing a multiple units of the same product that are processed together is called a batch. The third type is product level costs which arise from any activity in order to support the production of products. The fourth and the last type is facility level costs, this costs cannot be determined with a particular unit, product or batch; this costs are fixed with respect to batches, products and number of units produced. A single measure of volume is used for allocating costs to each service or product in traditional method for example: direct material cost, machine hours, direct labor cost and direct labor hours. A cost driver is an activity that generate costs, it can be generated by two types of costs the first is a particular machine 's running costs where the costs is driven by production volume as machine hours; the second is quality inspection costs where the cost is driven by the number of times the relevant activity occurs as the number of
Cost accounting system: a systm that estimates the cost of goods and services, as well as the cost of organisational units, such as departments.
"College Accounting Coach." Process Costing-Definitions And Features(Part1) « Process Costing « Cost Accounting «. Feb. 2007. Web
unit of time or the amount of a product produced per unit of time. A
(g) Utility is measured cardinally. This means that utility, or use of a good, can be expressed in terms of "units" or "utils". This utility is not only comparable but also quantifiable.