1 Cost concepts

Historical costs : Actual manufacturing cost incurred during the time of say one month / year for all the units of products produced in that period. .. calculated as.. direct material from material requisitions + direct labour from time cards + overheads from actual department overheads rates applied to direct labour from time cards. Future costs : future costs such as salaries of members of top mgt can be ignored bcoz these will not be affected by the current decision at hand. Standard costs : are what the costs should be ?? It composes of the standard quantities x standard cost + standard labour time x standard labour rates + standard overhead services x standard rates. Standards used from industry averages, past experiences, time and motion studies, counting material specifications. Prime costs : Direct material + Direct labour Direct costs : ~ that can be assigned directly to organization unit or a product. Depreciation of equipment in a dept or indirect labour working in a dept is example of direct departmental costs. Direct material and all labour are examples o direct product costs. Indirect costs : the costs that cannot be assigned are allocated or those small costs which can not be easily traced to the particular product. E.g. cotton waste, lubricant oils, watchmans salary, factory overheads i.e. rent, electricity etc. Opportunity costs : an economic resource that has been foregone as a result of accepting one alternative to another. E.g., a manufacturer sells a semi-finished product to outsider buyer for Rs 1000 ( whose cost is Rs. 800 ). He is considering a decision whether to keep it, finish it by expending additional Rs. 300, and sell it for total Rs. 1600. The profit out of the decision to complete it = Rs. 300 bcoz the cost of semi-finished product is Rs. 1000, which is opportunity cost. Imputed costs : Hypothetical costs not recognized by the accounting systems e.g. interest on capital. Joint costs :

The costs of manufacturing joint products prior to the split off point.. e.g. a company produces two products x and y as a result of particular joint process. After a certain operations stage say abc, x and y undergo different processes. . Thfore costs unto abc are called joint costs. Sunk costs : economic resources that have been already committed and which cannot be recovered e.g. amount spent on project to date that has not yielded results. These are not relevant for calculating future impact of a project. Discretionary costs : the costs that are decided as appropriate by the management to meet the organizations goals. These costs have no relationships with the capacity or output levels. E.g. for each planning period mgt will decide how much to spend for advertisement, promotion, public relation, R&D, charitable donations , employee training etc.. These costs become fixed for next planning period. Differential costs : The cost and only those additional costs that will be incurred as result of specific decision. Two characteristics : these are future costs that are expected to be prevailent at the time we intend to produce the product. They include only those additional costs that change as a result of the decision being analyzed . some costs like rent of the building will not change, costs previously incurred are ignored e.g. cost of R&D Practically these are out of pocket cash flows resulting from the decision. Very occasionally other assets are affected i.e. additional building required. Capacity costs : are fixed costs of being able to achieve the desired level of production or to provide desired level of services . Capacity costs can not be recovered during the down turns. Conversion costs : Direct labour + factory overheads Committed costs : Arise from possession of facilities , equipment and basic organization.,, These are obligatory .. mortgage lease payments, interest payments, property taxes, insurance .. only changes in philosophy, scope and scale of operations would change these costs in future period. Cost center : A responsibility center in which the manager is accountable for costs only. e.g. assembly lines in assembly dept. Variable costs :

that varies directly and proportionately with volume of production and sales. ( provided adequate capacity exists, range is in normal range of production ) Fixed costs : that do not change with production and sales Budgeted costs : Estimates of what costs will be ? Product costs : Related to number of products produced Period costs : Related to period Factory overheads : Fixed rent , depreciation. Variable overheads power, indirect labour. ****************************