DIFFERENT TYPES OF COST

Cost

“As a noun – The amount of cash or cash equivalent paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction.”


Common Cost

“Cost relating to more than one product or service.”


Committed Cost

“Cost arising from prior decisions, which cannot, in the short run, be changed. Committed cost incurrence often stems from strategic decisions concerning capacity with resulting expenditure on plant and facilities. Initial control of committed costs at the decision point is through investment appraisal techniques.”


Avoidable Cost

“Specific cost of an activity or sector of a business that would be avoided if the activity or sector did not exist.”


Conversion Cost

“Cost of converting materials into finished product, typically including direct labour, direct expense and production overhead.”


Direct Cost

“Expenditure that can be attributed to a specific cost unit, for example material that forms part of the product.”


Distribution costs

“Cost of warehousing saleable products and delivering them to customers. These costs are reported in the income of statement.”


Discretionary Cost

“Cost whose amount within a time period is determined by a decision taken by the appropriate budget holder. Marketing, research and training are generally regarded as discretionary costs. Also known as managed or policy costs.”


Fixed Cost

“Cost incurred for an accounting period, that, within certain output or turnover limits, tends to be unaffected by fluctuations in the levels of activity (output or turnover).”

Example: Rent


Joint Cost

“Cost of a process which results in more than one main product.”


Variable Cost

Cost which varies with the output is variable cost.

Example: Direct Material


Semi Variable Cost/Step up cost

This cost considers a combination of fixed cost & variable cost.


Long-term Variable Cost

“All costs are variable in the long run. Full unit costs may be surrogates for long-term variable costs if calculated in a manner which utilizes long-term cost drivers, for example activity-based costing.”


Marginal Cost

“Part of the cost of one unit of product or service that would be avoided if the unit was not produced, or that would increase if one extra unit were produced.”


Notional Cost

“Cost used in product evaluation, decision making and performance measurement to reflect the use of resources that have no actual (observable) cost. For example, notional interest for internally generated funds or notional rent for use of space.”


Opportunity Cost

“The value of the benefit sacrificed when one course of action is chosen in preference to an alternative. The opportunity cost is represented by the foregone potential benefit from the best rejected course of action.”


Prime Cost

“Total cost of direct material, direct labour and direct expenses.”


Product Cost

“Cost of a finished product built up from its cost elements.”


Production Cost

“Prime cost plus absorbed production overhead.”


Value Chain Analysis (Advanced Management Accounting)

In Value Chain analysis, business activities are classified into primary activities and support activities.

S. No

ACTIVITY

Primary Activity/Support Activity

1 Order processing and distribution Primary Activity
2 Installation, repair and parts replacement Primary Activity
3 Purchase of raw material and other consumable stores Support Activity
4 Transforming inputs into final products Primary Activity
5 Selection, promotion, appraisal and employee relations Support Activity
6 Material handling and warehousing Primary Activity
7 General management, planning, finance, accounting Support Activity
8 Communication, pricing and channel management Primary Activity

KAIZEN COSTING FOR CA FINAL STUDENTS

Kaizen costing is a cost reduction approach popular in Japan and now having global implication is explained below.
It is a cost reduction process which aims continuous improvement in manufacturing process. It sets monthly cost reduction target and try to get a target profit based on monthly basis and ultimately achieves annual cost reduction. It was first applied by a Japanese car manufacturer Daihatsu where six plans were involve:
Plan 1- Production, distribution, and Sales Plan(which includes projections of contribution margins from sales).
Plan 2- Projected parts and Materials Costs.
Plan 3– Plant Rationalization Plan(projected reductions in manufacturing variable costs).
Plan 4- Personnel Plan(for direct labor work force and service department personnel).
Plan 5- Facility Investment Plan (capital budget and depreciation).
Plan 6- Fixed Expense Plan(for prototype design costs, maintenance costs, advertising and sales promotion expenses, and general and administrative expenses).
Above six steps become the target profit basis. It aims to reduce both fixed cost and variable cost on the systematic basis on the monthly mode. Prior year data becomes the basis in both type of the cost. Reduction rate adjustment is done based on the target price. It allows management to decide the future cost reduction strategy.