What Is Cost Accounting? Definition, Concept, and Types

cost concept

Indirect costs, or untraceable costs, are those which do not directly relate to a specific activity or component of the business. For example, an increase in charges of electricity or taxes payable on income. Although we cannot trace indirect costs, they are important because they affect overall profitability. The monthly salary of the general manager, when one of the divisions is a costing unit, would be an Indirect Cost. The salary of the manager of the other division is neither a direct nor an indirect cost.

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate. Cost is “a foregoing, measured in monetary terms, incurred or potentially to be incurred to achieve a specific objective” (American Accounting Association). Cost is thus another vital concept in the study of business, so, without further ado let us start digging into its concept. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.

Managerial Accounting and Cost Concepts

From an economist’s point of view, the cost of manufacturing any goods and services is often said to be the concept of opportunity cost. The cost of renting the booth at the entertainment venue is a fixed cost. Assume Big Drink pays $3,500 per month to rent a booth at the entertainment venue. The cost concept total cost for rent is always the same regardless of how many drinks they sell. However, the per-unit cost allocated to drinks sold changes depending on the quantity sold. For example, if Big Drink sells 100 drinks the rent amount allocated per-unit is $3,500 divided by 100 equals $35 per drink.

  • The payments for wages and salaries, materials, license fee, insurance premium, depreciation charges are the examples of explicit costs.
  • The minimum charge is fixed because it does not change depending on actual usage.
  • Further suppose that the price of the land increases (e.g., twice the original cost in two years).
  • ’ This is a common phrase that is used as a general dialect now and then.
  • There are many types of economic costs that a firm should take into account during the decision-making process.

Under the cost concept of accounting, an asset should be recorded at the cost at which it was purchased, regardless of its market value. The map below shows average overall prices in Energy Concepts Enterprises’s service areas to give you a general idea of what to expect. Your specific energy needs, panel efficiency and other variables could make your costs higher or lower than these averages. However, in case of non monetary assets, the cost concept extends to their accounting subsequent to acquisition, cost continues to be the basis for all the subsequent accounting for the asset.

Types of Cost Accounting

Thus, that cost that induces any particular factor of production to remain in its existing use is known as opportunity cost. Select financial data for Cincy Chips is provided in Exhibit 1-9. As mentioned in the preceding section, a mixed cost has both a variable and a fixed component.

Short-run and long-run cost concepts are related to variable and fixed costs respectively, and often marked in economic analysis interchangeably. Short-run costs are the costs which vary with the variation in output, the size of the firm remaining the same. Long-run costs, on the other hand, are the costs which are incurred on the fixed assets like plant, building, machinery, etc. Such costs have long-run implication in the sense that these are not used up in the single batch of production. There are many types of economic costs that a firm should take into account during the decision-making process.

Fixed and Variable Costs

If he would have invested the amount in some other firm, then he could have earned a certain interest/dividend. Further, he invests time for his business and also contributes his entrepreneurial and managerial ability to the business. Cost refers the monetary measure of the amount of resources given up or used for some specified purpose.

Product costs are calculated as $1 per cushion times 10,500 sold equals $10,500. Period costs are $15,000 rent plus $9,600 miscellaneous expenses for a total of $24,600. Period costs are the other non-inventory costs Kelly incurred to run her business. When an asset is fully depreciated, it is worth nothing for accounting purposes, though the asset might actually have some scrap or minimal resale value. The asset is shown in the balance sheet at the net cost – original cost less depreciation.

Other names of variable costs are Prime Cost, Avoidable Cost, or Direct Cost. In other words, variable cost is the cost spent on variable factors such as power, direct labour, raw material, etc. The amount spent on these factors changes with the change in output level. Also, these costs arise till there is production and become zero at zero output level. Marginal costing (sometimes called cost-volume-profit analysis) is the impact on the cost of a product by adding one additional unit into production. Marginal costing can help management identify the impact of varying levels of costs and volume on operating profit.

cost concept


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