In accounting 'Cost' is defined as the value sacrificed to achieve resources or any specific objects. A cost is usually measured by monetary terms or amounts of money that need to be paid for acquiring goods or services. It is the amount denoted on invoices as the price and recorded in accounting books as an expense or asset cost basis.
Basic elements of cost are:
1. Raw materials
2. Labor
3. Expenses/overhead
Material (Material is a very important part of business):
• Direct material/Indirect material
Labor:
• Direct labor/Indirect labor
Overhead (Variable/Fixed):
• Production or works overheads
• Administration overheads
• Selling overheads
• Distribution overheads
• Maintenance & Repair
• Supplies
• Utilities
• Other Variable Expenses
• Salaries
• Occupancy (Rent)
• Depreciation
• Other Fixed Expenses
Types of accounting costs:
• Fixed Costs: In management accounting, fixed costs are defined as expenses that do not change with the function of activity of a business, within the relevant period. In economics, fixed costs, indirect costs or overheads are business expenses that are not dependent on the level or unit of goods or services produced by the business.
• Variable Costs: Variable costs are costs that change in proportion to the good or service units that a business produces. Variable costs are also the sum of marginal costs over all units produced. They can also be considered normal costs.
• Semi/Mixed Costs: A mixed cost is an expense that has elements of both fixed and variable costs. In other words, it’s a cost that changes with the volume of production like a variable cost and can’t be completely excluded like a fixed cost.
• Total Cost: In economics and cost accounting, total cost (TC) refers to the total economic cost of production and is made up of variable costs, which varies according to the quantity of a good produced and includes inputs such as labor and raw materials, plus fixed costs, which are independent of the quantity of a good produced and include inputs (capital) that cannot be varied in the short term, such as buildings and machinery.
• Opportunity Costs: In microeconomic theory, the opportunity cost of a choice is the value of the best alternative not taken, where a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made, it is the "cost" incurred by not having the benefit that would be had by taking the second best choice available.
• Explicit Cost: Explicit costs are opportunity costs that involve direct monetary payment by producers. The explicit opportunity cost of the factors of production not already owned by a producer is the price that the producer has to pay for them. Explicit costs are those expenses/expenditures that are actually paid by the firm. These costs are recorded in the books of accounts. Explicit costs are important for calculating the profit and loss accounts and guide in economic decision-making. Explicit costs are also called as "Paid out costs"
• Implicit Cost: Implicit costs (also called implied, imputed or notional costs) are the opportunity costs not reflected in cash outflow but implied by the failure of the firm to allocate its existing (owned) resources, or factors of production to the best alternative use. Implicit costs are a part of opportunity cost. They are the theoretical costs i.e., they are not recognized by the accounting system and are not recorded in the books of accounts but are very important in certain decisions. They are also called as the earnings of those employed resources which belong to the owner himself. Implicit costs are also called as "Imputed costs".
• Direct Costs: A price that can be completely attributed to the production of particular goods or services. Direct costs refer to materials, labor and expenses connected to the production of a product. A direct cost is traceable to a particular item, such as a product. For example, the cost of the materials used to create a product is a direct cost.
• Indirect Costs: Indirect costs are costs that are not directly accountable to a cost object (such as a particular project, facility, function or product). Indirect costs may be either fixed or variable. Indirect costs consist of administration, personnel and security costs. These are those costs which are not directly related to production. Some indirect costs may be overhead. But some overhead costs can be directly attributed to a project and are direct costs.
• Sunk Cost: In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken. Both retrospective and prospective costs may be either fixed (continuous for as long as the business is in operation and unaffected by output volume) or variable (dependent on volume) costs. Sunk costs are those do not alter by varying the nature or level of business activity. Sunk costs are generally not taken into consideration in decision making as they do not vary with the changes in the future. Sunk costs are a part of the outlay/actual costs. Sunk costs are also called as "Non-Avoidable costs" or "Inescapable costs".
• Incremental Cost: The additional cost of an additional quantity. It is similar to marginal cost, except that marginal cost refers to the cost of the next unit. Incremental costs are addition to costs resulting from a change in the nature of level of business activity. As the costs can be avoided by not bringing any variation in the activity in the activity, they are also called as "Avoidable Costs" or "Escapable Costs". More ever incremental costs resulting from a contemplated change is the Future, they are also called as "Differential Costs"
• Accounting Cost: Accounting costs are the actual or outlay costs that point out the amount of expenditure that has already been incurred on a particular process or on production as such accounting costs aid for managing the taxation need and profitability of the firm.
• Economic Cost: Economic costs are linked to the future. They play a vital role in business decisions as the costs considered in decision making are usually future costs. They have the nature similar to that of incremental, imputed explicit and opportunity costs.
• Marginal Costs: Marginal cost is the change in the aggregate costs due to change in the volume of output by one unit.
• Differential Costs: This cost is the difference in total cost that will arise from the selection of one alternative to the other.
• Opportunity Costs: It is the value of benefit sacrificed in favor of an alternative course of action.
• Relevant Cost: The relevant cost is a cost which is relevant in various decisions of management.
• Replacement Cost: This cost is the cost at which existing items of material or fixed assets can be replaced. Thus this is the cost of replacing existing assets at present or at a future date.
• Shutdown Cost: These costs are the costs which are incurred if the operations are shut down and they will disappear if the operations are continued.
• Capacity Cost: These costs are normally fixed costs. The cost incurred by a company for providing production, administration and selling and distribution capabilities in order to perform various functions.
• Other Costs
Classification of cost:
Classification of costs means the grouping of costs according to their common characteristics. Typical classification of costs is:
1. By Element: There are three elements of costing i.e. material, labor and expenses.
2. By Nature or Traceability: Direct Costs and Indirect Costs. Direct Costs are directly attributable/traceable to Cost Object. Direct costs are assigned to Cost Object. Indirect Costs are not directly attributable/traceable to Cost Object. Indirect costs are allocated or apportioned to cost objects.
3. By Functions: production, administration, selling and distribution, R&D.
4. By Behavior: fixed, variable, semi-variable. Costs are classified according to their behavior in relation to change in relation to production volume within given period of time. Fixed Costs remain fixed irrespective of changes in the production volume in given period of time. Variable costs change according to volume of production. Semi-variable costs are partly fixed and partly variable.
5. By control ability: controllable, uncontrollable costs. Controllable costs are those which can be controlled or influenced by a conscious management action. Uncontrollable costs cannot be controlled or influenced by a conscious management action.
6. By normality: normal costs and abnormal costs. Normal costs arise during routine day-to-day business operations. Abnormal costs arise because of any abnormal activity or event not part of routine business operations. E.g. costs arising of floods, riots, accidents etc.
7. By Time: Historical Costs and Predetermined costs. Historical costs are costs incurred in the past. Predetermined costs are computed in advance on basis of factors affecting cost elements. Example: Standard Costs.
8. By Decision making Costs: These costs are used for managerial decision making.
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