Cost Accounting
Terminoligies Used In Cost & Management Accounting Lecture-2 Himanshu Shah
Review Of Last Lecture
In last lecture we discussed
Branches of accounting Cost Classification
Cost Behaviour
Direct material Direct Labor Other direct production cost Factory overhead Fixed cost Variable cost Semi variable cost
Manufacturing Costs
Direct Materials Direct Labor Manufacturing Overhead
The Product
Direct Materials
Example: A radio installed in an automobile
Direct Labor
Example: Wages paid to automobile assembly workers
Cost Classifications for Predicting Cost Behavior
How a cost will react to changes in the level of business activity.
Total variable costs change when activity changes. Total fixed costs remain unchanged when activity changes.
Total Variable Cost
The total variable cost increases with increase in units..
Total Long Distance Telephone Bill Minutes Talked
Variable Cost Per Unit
The cost per unit is constant. For example, 10 paisa per minute.
Per Minute Telephone Charge Minutes Talked
The total fixed cost remains constant irrespective of numbers of units produced...
Total Fixed Cost
Monthly Basic Telephone Bill Number of Local Calls
The average cost per local call decreases as more local calls are made.
Monthly Basic Telephone Bill per Local Call
Number of Local Calls
Fixed Cost Per Unit
Important terms
Cost unit Cost center Revenue center Profit center Investment center Opportunity cost Relevant cost Irrelevant cost Sunk cost Product cost
Important terms
Historical cost Standard cost Implicit cost Explicit cost
Cost unit
It is a cost of a product or services in relation to which the cost is ascertained, in simple words the cost of producing the units.
Example Ball point for a Ball point manufacturing concern. Bottle for Beverage producing concern. Fan for a Fan manufacturing concern.
Cost centre
Cost centre is a production or service location where costs are incurred and may be attributed to cost units.
Examples Workshop in a manufacturing concern Auto service department Electrical service department Packaging department Janitorial service department
Revenue Center
It is part of the entity that earns sales revenue. Its manager is responsible for the revenue earned not for the cost of operations. Examples: Sales department Factory outlet
Profit Center
Profit centre is a section of an organization where the manager responsible for producing profit by utilizing resources assigned by the organization Examples: A branch A division
Investment Center
An investment centre is a segment which is a profit centre where the manager has a responsibility for making capital investment decision. Examples: A branch A division
Opportunity Cost
Opportunity cost is the value of a benefit sacrificed in favor of alternate decision. Example Building already let out at a rent of Rs. 10,000 that can be utilized at the palace of business. Rs 10,000 is opportunity cost for the business.
Relevant Cost
Relevant cost is that changes with a change in decision. These are future costs that affect the current decision.
Examples
Variable cost Fixed cost which changes with in an alternatives Opportunity cost
Irrelevant Cost
Irrelevant costs are the costs that would not effect the current decision.
Examples:
Building Rent Machine Depreciation
Sunk Cost
Sunk cost is the cost of resource already required that cannot be changed with the change in decision.
Examples: Research Cost Architect consultation fee
Product Cost
Product cost is a cost that is incurred in producing goods and services.
Example Direct material, direct labor and factory overhead
Period Cost
The cost are not related to production and are matched against on a time period basis are period cost
Example Selling and administrative expenses
Historical cost
Historical cost is an actual cost that is borne at the date of transaction .
Example A building was purchased for Rs 400,000, it is historical cost of building.
Standard Cost
Standard cost is a Predetermine cost of the units.
Example
Budgeted cost = Rs 400 Budgeted hours = 10 hours Standard cost per hour is Rs. 40
Implicit Cost
Implicit cost is an opportunity cost.
Example
Uses its own capital Uses its owner's time and/or financial resources
Explicit cost
The actual cost incurred is an explicit cost .
Example Wage Rent Materials