definitions of cost

8/8/2019 Definitions of Cost

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Subject : cost management

Presented to : Miss Saima

Presented by : MoodieZ Group

Mudassir Manzur Roll # 01 Abaid-ur-rahman Roll # 02Sana Mahmud Roll # 07SairaMuneer Roll # 34Hafiza Hanza Roll # 38Saima Parven Roll # 47


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A cost is the value of money that has been usedup to produce something


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` 1 . Fixed, Variable and Semi-Variable Costs

` Fixed Cost:T

he cost which does not vary but remainsconstant within a given period of time` Rent or rates` Insurance charges


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` Var iabl e Cost:` T he cost which varies directly in proportion with

every increase or decrease in the volume of

output or production is known as variable cost` Wages of laborers` Cost of direct material


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` S emi-v ar iabl e Cost:` T he cost which does not vary proportionately but

simultaneously does not remain stationary at all

times is known as semi-variable cost. It can alsobe named as semi-fixed cost. Some of itsexamples are as follows:

` Depreciation` Repairs


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` 2. P r oduct Costs an d Pe r iod Costs` P r oduct Costs:` T he costs which are a part of the cost of a product

rather than an expense of the period in which theyare incurred are called as product costs. ,

` e.g., cost of raw materials and direct wages,depreciation on plant and equipment etc.


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` Pe r iod Costs:` T he costs which are not associated with

production are called period costs. T hey are

treated as an expense of the period in which theyare incurred. T hey may also be fixed as well asvariable

` Eg; general administration costs, salaries

salesmen and commission, depreciation on officefacilities etc


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` 3 . Dir ect an d I n di r ect Costs` T he expenses incurred on material and labor

which are economically and easily traceable for a

product, service or job are considered as directcosts` Eg; materials are purchased, laborers are

employed and the wages are paid to them


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` In di r ect Costs` T he expenses incurred on those items which are

not directly chargeable to production are known as

indirect costs.` For example, salaries of timekeepers,

storekeepers and foremen


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` Accou n ting Costs` they are historical costs and show what has

happened under an existing set of circumstances.` For example, accounting costs may show the cost

of a product when the operations are manual


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` 5 . Re lev an t an d I rr e lev an t Costs` Relevant costs are those which change by

managerial decision.` Irrelevant costs are those which do not get

affected by the decision


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SaimaSaima ParveenParveen


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Sh utdow n Costs:` A manufacturer or an organization may have to

suspend its operations for a period on account of

some temporary difficulties,` e.g., shortage of raw material, non-availability of

requisite labor etc.


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` 7 . Co n tr o llabl e an d U n co n tr o llabl e Costs` Co n tr o llabl e Costs:` Controllable costs are those costs which can be

influenced by the ratio or a specified member of the undertaking .

` Un co n tr o llabl e Costs:` T he costs that cannot be influenced like this are

termed as uncontrollable costs.


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` 8 . Avoid abl e o r Esc apabl e Costs:

` Avoidable costs are those which will be eliminated

if a segment of a business(e.g., a product or department) with which theyare directly related is discontinued.


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` Una void abl e costs o r In esc apabl e Costs:` U navoidable costs are those which will not be

eliminated with the segment. Such costs are

merely reallocated if the segment is discontinued.


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` 9 . Im p uted o r Hyp ot h etic al Costs` T hese are the costs which do not involve cash

outlay. T hey are not included in cost accounts but

are important for taking into consideration whilemaking management decisions.` For example, interest on capital is ignored in cost

accounts though it is considered in financial

accounts


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` Diffe r e n tial s Cost:` T he difference in total cost between two

alternatives is termed as differential cost..` In c r eme n tal Cost:` . In case the choice of an alternative results in an

increase in total cost, such increased costs areknown as incremental costs.

` Assessing the profitability of a proposed change,the incremental costs are matched withincremental revenue


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` 11 . Out-of-Poc ket Costs` O ut-of-pocket cost means the present or future

cash expenditure regarding a certain decision that

will vary depending upon the nature of thedecision made.` For example, a company has its own trucks for

transporting raw materials and finished products

from one place to another


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` 12. Opp o r tu n ity Cost` O pportunity cost refers to an advantage in

measurable terms that have foregone on account

of not using the facilities in the manner originallyplanned


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` 13 Tra ce abl e Costs:

` T he costs that can be easily identified with a

department, process or product are termed astraceable costs.

` For example, the cost of direct material, directlabor etc.


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` Un tra ce abl e o r Commo n Costs:` T he costs that cannot be identified so are termed

as untraceable or common costs.

` For example, overheads incurred for a factory as awhole, combined purchase cost for purchasingseveral materials in one consignment etc.


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` 14 . P r oductio n Cost` T he cost of sequence of operations which begins

with supplying materials, labor and services and

ends with the primary packing of the product.` T hus, it includes the cost of direct material, direct

labor, direct expenses and factory overheads


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` Admi n ist ra tio n Cost:` T he cost of formulating the policy, directing the

organization and controlling the operations of an

undertaking which is not related directly to aproduction,` selling, distribution, research or development

activity or function.


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` S e lling Cost:` It is the cost of selling to create and stimulate

demand (sometimes termed as marketing) and of

securing orders.` Dist r ib utio n Cost:` It is the cost of sequence of operations beginning

with making the packed product available for

dispatch and ending with making thereconditioned returned empty package, if any,available for reuse.


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` Rese ar c h Cost:` It is the cost of searching for new or improved

products, new application of materials, or new or improved methods.

` Deve lo p me n t Cost` T he cost of process which begins with the

implementation of the decision to produce a new or improved product or employ a new or improvedmethod and ends with the commencement of formalproduction of that product or by the method.


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` 15 . Co n ve r sio n Cost` T he cost of transforming direct materials into

finished products excluding direct material cost is

known as conversion cost. It is usually taken as anaggregate of total cost of direct labor, directexpenses and factory overheads.

`


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` RE F EREN C E S:` www.netweb.princeton.edu` wikipedia.org` www.accountingcoach.com` www.ce.cmu.edu` www.wisegeek.com


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definitions of cost

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