Chapter 2

Cost Concepts

Concept of Cost Accounts

The basic approach to cost accounting is distinct from financial accounting. It is oriented to relating the expenditures to products in addition to analyzing the expenditures on the basis of natural classification of material, labour, etc. The cost of a product is taken as the final outcome of manufacturing activities.
Management Accounting By Paresh Shah Oxford University Press

Cost of Product
The fundamental element of cost accounting system is cost which is defined as the amount of expenditure (actual or notional) incurred on or attributable to a produced item or a service unit The term cost connotes different meanings to different people, but in cost accounting, it is used in a special sense. Cost represents an expenditure made to secure an economic benefit, generally on the uses of resources that promise to produce revenue. The resources may have tangible substance (e.g. manpower, material, machine, etc.), or they may take the form of services (e.g. wages, rent, power, etc.).
Management Accounting By Paresh Shah Oxford University Press

Cost, Expense, and Loss

The term cost is denoted by expense which is incurred after deriving the benefit. Expenses are defined as all explicit costs which are deductible from revenue. When the cost is incurred before deriving the benefit, it is termed as deferred cost, When no benefit is derived by the incurrence of cost, it is termed as loss,
Management Accounting By Paresh Shah Oxford University Press

Cost Object
Cost object is an entity or a part of an entity The cost object changes according to decision needs of the management. Costing objective represents the overall objective for which cost collection, cost analysis, and cost control is being attempted. Cost objective is different from expenditure objective.
Management Accounting By Paresh Shah Oxford University Press

Cost Unit and Cost centre

Cost unit is defined as a quantitative unit of a product, a service, or an item, in relation to which costs are measured. A cost unit, simply stated, is a unit of finished product, service or time, or a combination of these in relation to which cost is ascertained and expressed. A cost centre is a location, a person, or an item of equipment (or a group of these) for which costs may be ascertained and used for the purpose of cost control.
Management Accounting By Paresh Shah Oxford University Press

Types of Cost Centres

Personal and impersonal cost centre Operation and process cost centre Production, service and staff cost centre Whatever may be the type of cost centre, it is determined by taking into consideration the following factors:
the value of the work to be performed, the extent of cost control that can be exercised, responsibilities to be identified, and the uses of cost centre wise data by the costing department, etc.
Management Accounting By Paresh Shah Oxford University Press

Classification of Costs
Nature or element
Material cost Labour cost Expenses

Function
Production cost or Manufacturing cost Administration cost Selling cost Distribution cost Finance cost Research cost Development cost Pre-production cost
Management Accounting By Paresh Shah Oxford University Press

Classification of Costs
Conversion
Conversion cost

Variability or Behaviour
Fixed or Constant costs Variable costs Stepped Fixed cost Semi-Variable costs

Controllability
Controllable Uncomtrollable
Management Accounting By Paresh Shah Oxford University Press

Classification of Costs
Normality
Normal Abnormal

Capital and Revenue Time or Periodicity

Historical Future

Expiry Relationship
Management Accounting By Paresh Shah Oxford University Press

Classification of Costs
Product or Period
Products Period

Planning and Control

Marginal Out-of-pocket Differential Imputed or Notional Discretionary Sunk Opportunity Replacement Avoidable and unavoidable Programmed Joint Committed
Management Accounting By Paresh Shah Oxford University Press

Costing Principles
Relation of the causes Abnormal costs to be excluded Past costs not to be charged Future costs not to be charged Expenses and incomes excluded from cost accounts

Management Accounting By Paresh Shah Oxford University Press

Components of Total Costs

Prime costs Factory or Work costs Office or Cost of Production Total or Cost of Sales

Management Accounting By Paresh Shah Oxford University Press

Types of Costing Systems

Uniform Marginal Standard Historical Direct Absorption

Management Accounting By Paresh Shah Oxford University Press

Methods of Costing
Job Batch Contract Single or Output Process Operating or Service Multiple
Management Accounting By Paresh Shah Oxford University Press

Characteristics of Cost Information

Cost Tracing
Assigns costs on the basis of their cause

Cost Allocation
The allotment of costs to cost objectives

Cost Apportionment
Allotment of proportion of cost to cost objectives

Management Accounting By Paresh Shah Oxford University Press

Statement of Cost or Cost Sheet

A cost sheet is a statement which shows the details regarding the total cost of a cost object, i.e. for the company as a whole, for a product or a job. A cost sheet not only shows the total cost but also the various components of total cost. It serves the following purposes:
It discloses the various elements of cost which make up the total cost. It discloses the cost per unit as well as the total cost of output. It facilitates for preparation of tender price, and/or selling price in advance. It facilitates the comparison of current years total cost with the estimated cost and with the previous years cost, and thereby helps the management in locating inefficiency in activities of an organization.

Management Accounting By Paresh Shah Oxford University Press

Statement of Cost or Cost Sheet

Cost per Unit = Total Number of Units

Manufacturing cost per unit = Total Manufacturing Cost Number of Units Manufactured

Management Accounting By Paresh Shah Oxford University Press