Cost Accounting and Classification of Cost
What is Cost?
“Cost is the amount, measured in money, of cash expended or other property transferred, capital stock issued, services performed, or liability incurred, in consideration of goods or services received or to be received.”
What is Costing?
Costing is different from cost accounting. Costing is the technique and process of ascertaining cost whereas cost accounting is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and ascertainment of profitability.
OBJECTIVES OF COST ACCOUNTING
1. Ascertainment of cost
2. Fixation of selling price
3. Cost control
4. Matching cost with revenue
5. Special cost studies and Investigations
6. Preparation of financial statements, profit and loss account, balance sheet.
Classification of cost:
It is the process of grouping costs according to their common characteristics. Costs are to be classified suitably with cost centre or cost unit.
According to variability:
Fixed Cost: Fixed costs are costs that remain the same in total but vary per unit when production volume changes.
Facility-level costs, such as rent, depreciation of a factory building, the salary of a plant manager, insurance, and property taxes, are likely to be fixed costs.
Variable Cost: Variable costs vary in direct proportion to changes in production volume or level of activity but are constant when expressed as per unit amounts.
As production increases, variable costs increase in direct proportion to the change in volume; as production decreases, variable costs decrease in direct proportion to the change in volume.
Examples include direct material, direct labor (if paid per unit of output), and other unit-level costs, such as factory supplies, energy costs to run factory machinery, and so on.
Costs that vary with sales, such as sales commission are variable costs. It is a variable cost if it costs you more if you make or sell one more.
Mixed Costs (sometimes called semi-variable): One that contains both variable and fixed costs elements:.
Opportunity Cost: The potential benefit that is given up when one alternative is selected over another alternative.
Opportunity costs are not recorded/reported because they do not occur. The cost is the benefit that you gave up.
Example: The opportunity cost of going to college is the amount of money you would have made if you were working.
Sunk Cost: Cost that is already paid for and can not be changed by a decision made now or in the future.
Example: Tuition for this semester that you have already paid and will not get back for any reason.
Committed: Investment in facilities, equipment, and the basic operations of the company
1) long term in nature
2) can’t be significantly reduced, even over short periods of time without changing the long term goals of the company.
Difficult to change the cost once the commitment has been made.
Discretionary: Annual decisions made by management to spend in certain areas for certain things. Can be cut for short periods of time with minimal damage to long term goals.
ELEMENTS OF COST:
The product cost is divided into three – material, labor and other overhead expenses and these can be further analysed into different elements as shown below.
Prime cost = Direct materials + Direct labor + Direct expenses
Works cost (Factory) = Prime cost + Factory overhead
Cost of production = Factory cost + Administration overhead
Total cost (cost of sales) = Cost of production + Selling and distribution overhead.