Introduction to cost concepts

PGDM/ PGDM (Retail)-Trimester I Prof.Vanita Patel.

Introduction to Cost Terms

1.

2.
3. 4. 5. 6. 7. 8.

Cost object Cost driver Cost pool Cost hierarchy Cost centre Cost unit Cost accumulation Cost assignment

Contd..
9.Relevant range 10.Direct costs 11.Indirect costs 12.Fixed costs 13.Variable costs 14.Opportunity costs 15.Marginal costs or incremental costs 16.Controllable costs

Contd..
17.Non-controllable costs 18.Historical costs 19.Sunk costs 20.Estimated costs 21.Standard costs 22.Replacement costs 23.Discretionary costs 24.Total costs 25.Period costs 26.Product costs

1.Cost object

A cost object is any activity for which a separate measurement of costs is desired.

2.Cost Driver

A cost driver is a variable, such as the level of activity or volume that casually affects costs over a given time span. There is a cause-effect relationship between a change in the level of activity or volume and a change in the total costs.

3.Cost Pool
All

the costs that have homogeneous ,same or similar cause-effect relationship with the cost allocation base.

4. Cost Hierarchy

A cost hierarchy categories costs into different costs pools on the basis of different drivers or cost allocation base or different degrees of difficulties in determining cause-effect relationship.

5.Cost Centre
It is a location ,person or item of equipment in respect of which costs may be ascertained and related to cost unit for control purpose. It can be of two types, # Personal- which consists of a person or group of persons. # Impersonal- which consists of location or item of equipment.

6.Cost Unit
It

is a quantitative unit of product or services in relation to which costs are ascertained.

7.Cost Accumulation
It

is the collection of cost data in some organized way by means of an accounting system.

8.Cost assignment
It includes, 1.Tracing accumulated costs that have a direct relationship to a cost object,& 2.Allocating accumulated costs that have an indirect relationship to a cost object.

9.Relevant Range
It is the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question.

10.Direct Costs
Costs that can be easily identified or traced with specific activity, department ,products or processes in an economically feasible way.

11.Indirect Costs
The costs which have to be apportioned and cannot be allocated or traced with any activity ,department ,products or services.

12.Fixed Costs

Costs which remains fixed up to certain range of activity or for certain time.

13.Variable Costs

Cost which changes with the change in level of activity.

14.Opportunity Costs It is the measurable advantage forgone among next best alternative.

15.Marginal Costs

It is the change in the cost due to change in the output by one unit.

16.Controllable Cost

Costs which can be controlled by persons who are responsible for incurring it.

17.Non-Controllable Cost

These are the costs which cannot be controlled, unless that activity with which they are associated is abandoned.

18.Historical Costs It is the cost incurred/ spent which may or may not be recovered.

19.Sunk Costs

It is the historical cost which is irrecoverable. They are irrelevant in decision making.

20.Estimated Costs
It

is a predetermined cost.

21.Standard Cost

It is the most scientifically determined cost.

22.Replacement Cost It is the current cost of replacing an asset.

23.Discretionary Cost They are the fixed costs usually arises from periodic decisions that directly reflect management decisions.

24.Total Cost It is the sum of all cost to the unit.

25.Period Cost
Period costs are all costs in the income statement other than cost of goods sold. They are treated as expenses of the accounting period in which they are incurred because they are expected to benefit revenues in that period and are not expected to benefit revenues in future period.

26.Product Cost /Inventorial Cost

They are all cost of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold only when the product is sold.

Summary
The purpose of well understanding of these cost concepts, methods ,tools and techniques equips managers to take strategic decisions for the organisation.