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Costing Types of Costs

There are many types of costs that are relevant for businesses to consider, including fixed costs, variable costs, marginal costs, opportunity costs, sunk costs, and explicit vs implicit costs. Fixed costs remain constant regardless of production levels while variable costs change based on production amounts. Marginal costs refer to the change in total costs from producing an additional unit. Opportunity costs represent earnings forgone from the next best alternative use of resources. Understanding the different types of costs is essential for business decision making.

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99 views

Costing Types of Costs

There are many types of costs that are relevant for businesses to consider, including fixed costs, variable costs, marginal costs, opportunity costs, sunk costs, and explicit vs implicit costs. Fixed costs remain constant regardless of production levels while variable costs change based on production amounts. Marginal costs refer to the change in total costs from producing an additional unit. Opportunity costs represent earnings forgone from the next best alternative use of resources. Understanding the different types of costs is essential for business decision making.

Uploaded by

Cohin Bellara
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Click to edit Master subtitle style Proff.

Salim

Costing

Click to edit Master subtitle style TYPES OF COST


PANKTI DESAI-3 ARSHAD SHAIKH- 7 KOHIN BELLARA-10 RONAK SARFARE-15 LARSEN LEWIS-9

INTRODUCTION
In accounting, the term cost refers to the monetary value of expenditures for raw materials, equipment, supplies, services, labour, products, etc. It is an amount that is recorded as an expense in bookkeeping records. Generally, the term cost of production refers to the money expenses incurred in the production of a commodity. But money expenses are not the only expenses incurred on the production of a commodity. But there are number of services and inputs such as entrepreneurship, land, capital etc. which are offered by an entrepreneur without changing any price or receiving any payment for them. While computing the total cost of production, allowance should be made for such expenses. It is therefore essential to have clean understanding for the different types of cost.

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TYPES OF COSTS
There are several types of costs that a firm may consider relevant under various circumstances. Such costs include future costs, accounting costs, opportunity costs, implicit costs, fixed costs, variable costs, semi variable costs, private costs, social costs, common costs, etc. For the purposes of decisionmaking, it is essential to know the fundamental difference between the main cost concepts along with the conditions of their use in decision-making.

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ACTUAL COST AND OPPORTUNITY COST


Actual costs are the costs which the firm incurs while producing or acquiring a good or a service like the cost on raw material, labour, rent, interest and it is also The actual costs are also called the outlay costs or acquisition costs or absolute costs.

Opportunity costs or alternative costs are the return from the second-best use of the firms resources which the firm forgoes in order to avail of the 4/18/12

SUNK COST
Sunk costs are the costs that are not altered by a change in quantity and cannot be recovered; e.g., depreciation. Sunk costs are a part of the outlay costs. However, most business decisions require cost estimates that are essentially incremental and not sunk in nature.

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EXPLICIT OR IMPLICIT COST


Explicit costs are those expenses which are actually paid by the firm (paid-out costs).These costs appear in the accounting records of the firm. Example: Interest payment on borrowed funds, rent payment, wages, utility expenses etc. Implicit or imputed costs are theoretical costs in the sense that they go unrecognized by the accounting system. These costs may be defined as the earnings of those employed resources which belong to -the owner himself. Examples: Rent on idle land

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INCREMENTAL COSTS
The incremental costs are the additions to costs resulting from a change in the nature and level of business activity, e.g., change in product line or output level, adding or replacing a machine, changing distribution channels, etc. These costs can be avoided by not bringing about any change in the activity, the incremental costs are also called avoidable costs or escapable costs. Moreover, since incremental costs may also be regarded as the difference in total costs resulting from a contemplated change, they are also called differential costs. Example: Change in distribution channels adding or deleting a product in the product line..

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BOOK COSTS AND OUT-OF POCKECT COSTS


Book costs are those business costs which do not involve any cash payments but for them a provision is made in the books of account to include them in profit and loss accounts and take tax advantages, like the provisions for depreciation and for unpaid amount of the interest on the owner's capital employed in the firm. Out-of-pocket costs are those expenses which are current cash payments to outsiders. All the explicit costs like payment of rent, wages, salaries, interest, transport charges, etc., fall in the category of out-of-pocket costs.

Examples:
Rent Paid, wages, salaries, interest etc
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PRIVATE COST AND SOCIAL COSTS


Social costs are the expense to an entire society resulting from a news event, an activity or a change in policy. When assessing the overall impact of its commercial actions in terms of social costs, a socially responsible business operator should take into account its own production expenses, as well as any indirect expenses or damages borne by others. Private costs are those which are actually incurred or provided for by an individual or a firm for its business activity. Example.Capital raised for starting a new business.

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DIRECT COSTS
Direct Cost - Direct costs are those which have direct
relationship with a unit of operation like manufacturing a product, organizing a process or an activity etc. In other words, direct costs are those which are directly and definitely identifiable. The nature of the direct costs are related with a particular product/process, they vary with variations in them. Therefore all direct costs are variable in nature. It is also called as "Traceable Costs" Examples: In operating railway services, the costs of wagons, coaches and engines are direct costs.

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INDIRECT COST
The Indirect or no traceable or common or non assignable costs are those whose course cannot be easily and definitely traced to a plant, a product, a process or a department. They are the costs that are not directly accountable to a cost object (such as a particular function or product). Indirect costs may be either fixed or variable.

Example. Taxes, Administration, Personnel and Security


costs, and are also known as overhead.

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CONTROLLABLE AND NONCONTROLLABLE COSTS


Controllable costs are those which are capable of being
controlled or regulated by executive vigilance and, therefore, can be used for assessing executive efficiency. Example: Inventory costs can be controlled at the shop level etc. Non-controllable costs are those which cannot be subjected to administrative control and supervision. Most of the costs are controllable, except, of course, those due to obsolescence and depreciation.

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SHUTDOWN COSTS AND ABANDONMENT COSTS


Shutdown costs are those which the firm incurs if it temporary stops it
operations. These costs could be saved if the operations are allowed to continue. Shutdown costs include, besides the fixed costs, the cost of sheltering plant and equipment, lay-off expenses, employment and training of workers when the plant is restarted, and above all loss of the market.

Abandonment costs are the costs of retiring altogether a fixed asset


from use. Example, the plant installed during war time may be so improvised that it may not be required during peace time. Abandonment costs thus, involve the problem of the disposal of assets.

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URGENT COST AND POSTPONABLE COST


Urgent cost Urgent costs are those costs which have to be
incurred compulsorily by the management in order to continue its operations. If urgent costs are not incurred in time the operational efficiency of the firm falls. Example: Cost of material, labour, fuel etc

Postponable cost being shifted to the future with little effect


on the efficiency of current operations. Example Routine maintenance is an example.

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BUSINESS COSTS AND FULL COSTS


Business costs Business costs are relevant for the firm's profit
and loss accounts and for legal and tax purposes. These costs include all the payments and contractual obligations made by the firm together. Cost of depreciation an plant and equipment.

Full costs is the sum of opportunity cost and normal profit. Opportunity cost is the expected earnings from the next best use of the firm resources like capital, land, buildings and entrepreneur's effort and time. In order that the firm continues to produce, it must earn a necessary minimum return, called the normal profit.

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TOTAL COST, AVERAGE COST AND MARGINAL COSTS Total cost represents the money value of the total
resources for production of goods and services by the firm.

Average cost is the cost per unit of output, assuming


that production of each unit of output incurs the same cost .That is, Average cost = Total cost units. Number of

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MARGINAL COST
Marginal costs are the incremental or additional costs incurred when there is additional to the existing out puts of goods and services. Eg. If the total cost increase from Rs. 2000 to Rs. 2100 when production increase from 10 units to 11 units, the marginal costs of 11th unit is: Rs. 2100- Rs. 2000= Rs.100

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FIXED COST AND VARIABLE COSTS


Fixed (or, constant) costs are that part of the total cost of the firm which does not vary with output, Example. expenditures on depreciation, rent of land and buildings, property taxes, etc. If the period under consideration is long enough to allow the necessary adjustments in the capacity of the firm, the fixed costs no longer remain fixed. Variable costs, on the other-hand, are directly dependent on the volume of output or service. Variable costs increases but not necessarily in the same proportion as the increase in output. Example expenditure on labour, raw material, etc.
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SHORT RUN AND LONG RUN COSTS


The short-run is defined as a period in which the supply of at least one of the inputs cannot be changed by the firm. Thus, in the short-run; some inputs are fixed (like installed capacity) while others are variable Long-run, on the other hand, is defined as a period in which all inputs can be varied as desired: In other words, it is that time-span in which all adjustments and changes are possible to realise.

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