Cost:
It is the amount of resources given up in exchange for some goods or services. The resources given up are expressed in monetary terms. Cost is defined as “the amount of expenditure (actual or notional) incurred on or attributable to a given thing or to ascertain the cost of a given thing”.The Committee on Cost Terminology of the American Accounting Association has defined cost as “the foregoing, in monetary terms, incurred or potentially to be incurred in the realisation of the objective of management which may be manufacturing of a product or rendering of a service”.
If the purpose of the study of cost is the same, different conditions may lead in variation in cost. The cost per unit of a product changes with increase or decrease in volume of output as the amount of fixed expenses to be borne by each unit of output decreases or increases with increase or decrease ir units of production.It is to be noted carefully that there is no such thing as an exact cost or true cost as no figure of cost is true in all circumstances and for all purposes. True cost can be only upto the stage of prime cost. But as soon as overheads are included in total cost on estimated basis, the total cost becomes estimated cost, which can be used to obtain a reasonable degree of accuracy.
(2) Expense:
Expenses are costs which have been applied against revenue of particular accounting period in accordance with the principle of matching cost to revenue e.g., cost of goods- sold, office salaries of the period in which they are incurred.
(3) Loss:
It represents diminution in ownership equity other than from withdrawal of capital for which no compensating value has been received e.g., destruction of property by fire. Thus the central idea of the cost concept is that of giving up, parting with or sacrificing something or value to acquire some other thing or value; expense refer to that portion of such sacrifices which are assigned to a particular accounting period. Loss denotes sacrifice for which there is no corresponding return whereas cost implies sacrifices for the sake of, and accompanied by, the securing of some other value.
(4) Cost Centre:
A cost centre is the smallest segment of activity or area or responsibility for which costs are accumulated. Typically cost centres are departments but in some instances, a department may contain several cost centres. These cost centres are the departments or sub- departments of an organisation with reference to which cost is collected for cost ascertainment and cost control.
For example, although an assembly department may be supervised by one foreman, it may contain several assembly lines. Sometimes each assembly line is regarded as a separate cost centre with its own assistant foreman. A cost centre can be a location, i.e., an area such as department, storeyard or sales area or an item of equipment, e.g., lathe machine, delivery vehicle or a person, e.g., salesman, foreman.
Types of Cost Centres:
Cost centres may be classified as under:
(i) Personal and impersonal cost centres:
Personal cost centre is one which consists of a person or a group of persons. On the other hand, impersonal cost centre consists of a machine, a department or plant
(ii) Operation and process cost centres:
Operation cost centre consists of those persons and/or machines carrying out the same kind of operation. On the other hand a centre which has a continuous sequence of operations is called process cost centre.
(iii) Production and service cost centres:
Product centre refers to a centre through which a product passes and generally corresponds to a production department. In such centres, raw materials are converted into finished goods. Service centre is a department or centre which incurs direct and indirect costs but does not work directly on products. Maintenance department and general factory office are examples of such centres. Such centres are ancillary and render service to production centres to enable them to carry out the work of production smoothly. The numbers of cost centres vary from organisation to organisation.
In engineering industry, the cost centres may be:
(i) Machine shop,
(ii) Welding shop,
(iii) Assembly shop,
(iv) Maintenance department,
(5) Profit Centre:
A profit centre is that segment of activity of a business which is responsible for both revenue and expenses and discloses the profit of a particular segment of activity. Profit centres are created to delegate responsibility to individuals and measure their performance. Profit centre is different from cost centre.
Difference between Cost Centre and Profit Centre:
Following are the main points of difference between a cost centre and profit centre:
1. Cost centre is the smallest unit of activity or area of responsibility for which costs are collected whereas a profit centre is that segment of activity of a business which is responsible for both revenue and expenses.
2. Cost centres are created for accounting conveniences of costs and their control whereas a profit centre is created because of decentralisation of operations i.e., to delegate responsibility to individuals who have greater knowledge of local conditions etc.
3. Cost centres are not autonomous whereas profit centres are autonomous.
4. A cost centre does not have target costs but efforts are made to minimise costs, but each profit centre has a profit target and enjoys authority to adopt such policies as are necessary to achieve its targets.
5. There may be a number of cost centres in a profit centre as production or service cost centres or personal or impersonal but a profit centre may be a subsidiary company within a group or division in a company.
(6) Cost Object and Cost Driver:
Cost Object is anything (or activity) for which a separate measurement of cost is desired. In other words, if the users of accounting information want to know cost of something, this something is called cost object.
Examples of cost objects include the cost of a product, the cost of rendering a service to a bank customer or hospital patient, the cost of operating a particular department or sales territory or indeed anything for which one wants to measure the cost of resources used. A Cost Driver is any factor that influences costs. A change in the cost driver will lead to a change in the total cost of a related cost object. Examples of cost drivers are: number of units produced, number of set ups, number of items distributed, number of customers served, number of advertisements, number of sales personnel number of products produced etc.
(7) Conversion Cost:
Conversion Cost is the sum of direct wages, direct expenses and manufacturing overhead costs of converting raw material from one stage of production to the next. In other words, conversion cost is works cost minus the cost of direct materials.
(8) Contribution Margin:
This is the excess of sales price over variable costs. This can be expressed in total or ratio of sales or percentage of sales.
(9) Carrying Costs:
Carrying costs, also known as holding costs, are basically the costs incurred on the maintenance of inventory and include cost of the money locked up in the inventory, inventory obsolescence, storage space rent and cost of stores operation.
(10) Out-of-Stock Cost:
Tins cost takes place when a stock shortage occurs and includes loss of sales, loss of goodwill on account of disgruntled customers and employees’ ill will and cost of idle machines.
(11) Ordering Costs:
These costs are incurred each time an order for the purchase of material is placed and are expressed as rupee cost per order and include the cost of getting an item into the firm’s inventory.
(12) Development Cost:
It is the cost of the process which begins with the implementation of the decision to produce a new or improved method and ends with the commencement of formal production of the product by that method.
(13) Policy Cost:
It is the cost which is in addition to normal requirement, incurred in accordance with the policy of an undertaking.
(14) Discretionary Costs:
Discretionary costs, also known as managed costs or programmed costs, include fixed costs that arise from periodic appropriate decision that directly reflect top management policies. These costs are not tied to a clear cause and effect relationship between inputs and outputs. They usually arise from periodic decisions regarding the maximum outlay to be incurred. Examples include advertising, public relations, training, etc.
(15) Idle Facilities Cost:
It is the cost of abnormal idleness of fixed assets or available, services.
(16) Expired Cost:
It is the cost which is related to the current period as an expense or loss.
(17) Incremental Revenue:
Incremental revenue reflects the difference in revenue between two alternatives. While making an assessment of profitability of a proposed alternative, incremental revenues are compared with incremental costs.
(18) Added Value:
It is the change in market value resulting from an alteration in the form, location or availability of a product or service excluding the cost of bought-out materials or services. Unlike conversion cost it includes profit.
(19) Urgent Costs:
These costs are to be incurred immediately in order to avoid the hampering of production line. These are absolutely essential and their shifting to future period will have adverse effect on the efficiency of operation in hand.
(20) Postponable Costs:
Such costs can be postponed or shifted to the future period generally without any effect on the efficiency of current operations. Such cost is only a deferment of cost and not avoiding altogether.
(21) Pre-production Costs:
These are costs incurred during the period when a new factory is in the process of being established, a new project is undertaken or a new product line or product is taken up but there is no established or formal production to which such costs may be charged. These costs are normally treated as deferred revenue expenditure (except the portion which is capitalised) and are charged to future production.
(22) Research Cost:
These are costs incurred in the discovery of new ideas or processes by experiment or otherwise and for putting the results of such experiments on a commercial basis. Research cost is defined as the cost of searching for new or improved product, new application of material or new improved methods, processes, systems or services.
(23) Training Cost:
The cost of training workers, apprentices and staff, generally comprises of their wages and salaries, pay and allowances of the training and teaching staff, payment of fees etc. for training or for attending courses of studies sponsored by outside agencies, and cost of material, tools and equipment used in training work.
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