costing types of costs

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Click to edit Master subtitle styleCosting

Proff. Salim


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Click to edit Master subtitle styleTYPES OF COST

PANKTI DESAI-3ARSHAD SHAIKH- 7

KOHIN BELLARA-10RONAK SARFARE-15

LARSEN LEWIS-9


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INTRODUCTION

In accounting, the term cost refers to the monetary value of expendituresfor raw materials, equipment, supplies, services, labour, products, etc. Itis an amount that is recorded as an expense in bookkeeping records.

Generally, the term cost of production refers to the money expensesincurred in the production of a commodity. But money expenses are not

the only expenses incurred on the production of a commodity. But thereare number of services and inputs such as entrepreneurship, land, capitaletc. which are offered by an entrepreneur without changing any price orreceiving any payment for them. While computing the total cost of

production, allowance should be made for such expenses. It is therefore

essential to have clean understanding for the different types of cost.


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TYPES OF COSTS

There are several types of costs that a firm may consider relevantunder various circumstances.

Such costs include future costs, accounting costs, opportunity costs,

implicit costs, fixed costs, variable costs, semi variable costs, privatecosts, social costs, common costs, etc. For the purposes of decision-making, it is essential to know the fundamental difference betweenthe main cost concepts along with the conditions of their use indecision-making.


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ACTUAL COST ANDOPPORTUNITY COST

Actual costs are the costs which the firm incurs while producing oracquiring a good or a service like the cost on raw material, labour, rent,interest and it is also The actual costs are also called the outlaycosts oracquisition costs or absolute costs.

Opportunity costs or alternative costs are the return from the second-best

use of the firms resources which the firm forgoes in order to avail of there urn from he bes use of he resources.


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SUNK COST

Sunk costs are the costs that are not altered by a change in quantity

and cannot be recovered; e.g., depreciation. Sunk costs are a partof the outlay costs. However, most business decisions require costestimates that are essentially incremental and not sunk in nature.


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EXPLICIT OR IMPLICIT COST

Explicit costs are those expenses which are actually paid by thefirm (paid-out costs).These costs appear in the accounting recordsof the firm. Example: Interest payment on borrowed funds, rent

payment, wages, utility expenses etc.

Implicit or imputed costs aretheoretical costs in the sense thatthey go unrecognized by the accounting system. These costs may

be defined as the earnings of those employed resources whichbelong to -the owner himself. Examples: Rent on idle land


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INCREMENTAL COSTS

The incremental costs are the additions to costs resulting from a

change in the nature and level of business activity, e.g., change inproduct line or output level, adding or replacing a machine,changing distribution channels, etc.

These costs can be avoided by not bringing about any change in

the activity, the incremental costs are also called avoidable costs orescapable costs.

Moreover, since incremental costs may also be regarded as thedifference in total costs resulting from a contemplated change, they

are also called differential costs.Example: Change in distributionchannels adding or deleting a product in the product line..


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BOOK COSTS AND OUT-OF POCKECTCOSTS

Book costs are those business costs which do not involve any cashpayments but for them a provision is made in the books of accountto include them in profit and loss accounts and take tax

advantages, like the provisions for depreciation and for unpaidamount of the interest on the owner's capital employed in the firm.

Out-of-pocket costs are those expenses which are current cashpayments to outsiders. All the explicit costs like payment of rent,

wages, salaries, interest, transport charges, etc., fall in the categoryof out-of-pocket costs.

Examples:

Rent Paid, wages, salaries, interest etc


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PRIVATE COST AND SOCIAL COSTS

Social costs are the expense to an entire society resulting froma news event, an activity or a change in policy. When assessing theoverall impact of its commercial actions in terms of social costs, asocially responsible business operator should take into account its

own production expenses, as well as any indirect expensesor damages borne by others.

Private costs are those which are actually incurred or provided

for by an individual or a firm for its business activity.Example.Capital raised for starting a new business.


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DIRECT COSTS

Direct Cost -Direct costs are those which have directrelationship with a unit of operation like manufacturing a product,organizing a process or an activity etc. In other words, direct costsare those which are directly and definitely identifiable. The natureof the direct costs are related with a particular product/process,

they vary with variations in them. Therefore all direct costs arevariable in nature. It is also called as "Traceable Costs"

Examples: In operating railway services, the costs of wagons,coaches and engines are direct costs.


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INDIRECT COST

The Indirect or no traceable or common or non assignablecosts are those whose course cannot be easily and definitelytraced to a plant, a product, a process or a department. They arethe costs that are not directly accountable to a cost object (such

as a particular function or product). Indirect costs may beeither fixed or variable.

Example. Taxes, Administration, Personnel and Securitycosts, and are also known as overhead.


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CONTROLLABLE AND NON-CONTROLLABLE COSTSControllable costs are those which are capable of beingcontrolled or regulated by executive vigilance and, therefore, can

be used for assessing executive efficiency.Example: Inventorycosts can be controlled at the shop level etc.

Non-controllable costs are those which cannot be subjected toadministrative control and supervision. Most of the costs arecontrollable, except, of course, those due to obsolescence and

depreciation.


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SHUTDOWN COSTS ANDABANDONMENT COSTSShutdown costs are those which the firm incurs if it temporary stops itoperations. These costs could be saved if the operations are allowed tocontinue. Shutdown costs include, besides the fixed costs, the cost ofsheltering plant and equipment, lay-off expenses, employment and trainingof workers when the plant is restarted, and above all loss of the market.

Abandonment costs are the costs of retiring altogether a fixed asset

from use. Example, the plant installed during war time may be soimprovised that it may not be required during peace time. Abandonment

costs thus, involve the problem of the disposal

of assets.


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URGENT COST ANDPOSTPONABLE COSTUrgent cost Urgent costs are those costs which have to beincurred compulsorily by the management in order to continue itsoperations. If urgent costs are not incurred in time the operational

efficiency of the firm falls.Example: Cost of material, labour,

fuel etc

Postponable costbeing shifted to the future with little effecton the efficiency of current operations. Example Routinemaintenance is an example.


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BUSINESS COSTS AND FULL COSTS

Business costs Business costs are relevant for the firm's profitand loss accounts and for legal and tax purposes. These costsinclude all the payments and contractual obligations made by thefirm together. Cost of depreciation an plant and equipment.

Full costs is the sum of opportunity cost and normal profit.Opportunity cost is the expected earnings from the next best use ofthe firm resources like capital, land, buildings and entrepreneur'seffort and time. In order that the firm continues to produce, it mustearn a necessary minimum return, called the normal profit.


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TOTAL COST, AVERAGE COST ANDMARGINAL COSTS

Total cost represents the money value of the totalresources for production of goods and services by thefirm.

Average cost is the cost per unit of output, assumingthat production of each unit of output incurs the samecost .That is,

Average cost = Total cost Number ofunits.


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MARGINAL COST

Marginal costs are the incremental or additional costsincurred when there is additional to the existing out putsof goods and services. Eg. If the total cost increase fromRs. 2000 to Rs. 2100 when production increase from 10

units to 11 units, the marginal costs of 11th unit is: Rs.2100- Rs. 2000= Rs.100


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FIXED COST AND VARIABLE COSTS

Fixed (or, constant) costs are that part of the totalcost of the firm which does not vary with output,Example. expenditures on depreciation, rent of landand buildings, property taxes, etc. If the period underconsideration is long enough to allow the necessary

adjustments in the capacity of the firm, the fixedcosts no longer remain fixed.

Variable costs, on the other-hand, are directlydependent on the volume of output or service.

Variable costs increases but not necessarily in thesame proportion as the increase in output. Exampleexpenditure on labour, raw material, etc.


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SHORT RUN AND LONG RUNCOSTS

The short-run is defined as a period in which the supplyof at least one of the inputs cannot be changed by thefirm. Thus, in the short-run; some inputs are fixed (likeinstalled capacity) while others are variable

Long-run, on the other hand, is defined as a period inwhich all inputs can be varied as desired: In other words,it is that time-span in which all adjustments and changesare possible to realise.


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costing types of costs

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