Cost concept and classification in accounting

Cost concept and classification in accounting
Cost concept and classification
What is mean Cost concept and classification? 
Concept of cost
The term "cost" has a variety of interpretations in common use. In ordinary language, it may mean price. The oxford dictionary defines ("cost as the price for something.
Cost concept and classification,  cost classification,classification of cost,Cost concept and classification pdf
But in cost accounting, it is considered different from price").

In cost accounting, cost is the amount of resources given up in exchanges for some goods or services. The resources given up are generally in terms of money or if not in terms of money, they are always expressed in monetary units. It consists of all the expenses incurred in processing a commodity or exciting a contract. It signifies an expendititures or monetary outlay to secure some benefit.

The terms "cost" itself  has no significant meaning, therefore, it  is always used with an adjective or phrase that conveys the meaning  interred, such as  prime, direct, indirect, fixed, variable, controllable, opportunity, differential, marginal, replacement and the like.  S such description implies a certain characteristic, which is importance in computing, meaning and analyzing the cost.
According to hongren, sundem and stration: (" t he cost may be defined as the sacrifice or given up resources for a particular purposed. Cost accounting is frequencently measured units that must be paid for goods and services.").
For above definitions, it is clear that cost is the expenditures or sacrifice made for goods of services.
Items relating to cost concepts
Expenses
When the cost is recognized and recorded after the benefit has been obtained, it is called expenses. To find out net income, it appears in the appears in the profit and loss account or income statement of a given period as deduction. It is matched against their revenues to calculate the profit or loss of a certain period. It represented sacrifice of resources forum economic benefit.

Expenses are properly deducted form revenues. Therefore, expenses are also known as expired cost and are incurred and totally used up in generation of revenue. Examples of expired costs are cost of goods sold expenses, selling and administrative expenses. Expenses needs not necccesarily have to be paid in cash immediately, even a promises to pay could be made for the benefit obtained. The cost that cannot be deducted from revenue is an expense not a cost.
Loss
If benefit is derived from an expired cost, it is called a loss. if no benefit is received from the cost incurred  or it certain that no benefit will accrue, that cost become a lost cost or loss. It also refers to the amount of different between the expense and revenues i.e., when expenses exceed revenues for an accounting period. A loss related to the net effect of an unforgivable transaction, event or situation not arising from a normal business activity. If it can be established that there is no matching economic benefit that cost, it is known as loss. It can also be said that, loss represent reduction in ownership equity other than from withdrawal of capital for which no compensating value is received e.g., destruction of property by fire.
Cost center
Cost center is a location, present or items of equipment for which cost may be ascertained and used for the purpose of cost control. Icma defines cost center as (" a production or services, function, activities or items of equipment whose costs may be attributed to cost units. A cost center is the smallest organizations sub-unit for which separate cost allocation is attenuated."). From function point of view, a cost center may be relatively easy to establish, because a cost center a cost center is any unit of the organization to which costs can be separately attributed. A cost center is a center is an individual activity or group of similar activity for which costs are department or a work group is considered as cost center.
Profit center
A profit center is any sub-unit of an organization to which both revenues and cost are assigned, so that the responsibility of a sub-unit may be measured. Profit center is a segment of the business entity by which both revenues received and expenditures incurred are controlled, s such revenues and expenditure being used to evaluate segment performance. In profit center, both input and output are capable of measurement bin financial terms and it provides more effective assessment of the manager's performance since both costs and revenues are measured in money terms.
Cost unit
A cost unit is a unit of product or unit of service to which cost are ascertained by means of allocation, apportionment and abortion. Unit of quality of product, services or time or a combination of these in relation to which costs are expressed or ascertained. For example, specific jobs, contracts, unit of product like fabrication job, road construction contract an automobile truck, a table, 2000 bricks etc.
Cost driver
A cost driver is any factor that influences costs. A change in the cost driver will lead to a change in the total cost related cost object. Examples of cost drives  are, number of units product, number of setups, number of items distributed, number of customers served, number of advertisement, number of sales personnel, number of product etc. any changes made in any the cost drivers causes a change in the total cost. It is for the management to see whether any changes in driver's causes a made or not keeping in view the cost benefit analysis of the changes in the cost driver.
Cost estimation and cost ascertainment
Cost estimation is the process of pre-determining the costs of a certain products, job or odder. Such pre determination may be required for several purposes such as budgeting, measurement of performance efficiency, and preparation of financial statements (valuation for stocks) make or buy decision; fixation of the sale prices of products etc. cost ascertainment is the process of determining costs on the basis of actual data. Hence, computation of historical cost is cost ascertainment while computation of future cost is cost estimation. Cost estimation as well as cost ascertainment both are inter-related and are of immerses use to the management. In case a concern has a sound costing system, the ascertained costs well greatly help the management in the process of estimation of rational accurate costs, which are so necessary for a variety of purpose stated above. Moreover, the ascertained cost may be compared with the predestined cost on a continuing basis and proper and timely steps be taken for controlling costs and maximizing profits.
Cost allocation and cost apportionment
Cost allocation and cost apartment are the two processes, which describe the identification and allotment of cost to cost centers or cost units. Cost allocation refers to "the allotment of whole items of cost to cost center or cost units" (cima). Thus, the later involves the process of charging direct expenditure to cost center or cost units while the later involves the process of charging indirect expenditures to cost centers or cost units. For example, the cost of labor engaged in a service department can be charged wholly and directly to it but the canteen expenses of the factory cannot be charged directly and wholly to it. Its proportionate share will have to be found out. Charging of cost in the former case will be termed as "allocation of cost" while in the latter case as" apportionment of cost".
Cost reduction and cost control
Cost reduction and cost control are two different concepts. Cost control is related to achieving the cost target as its objectives while cost reduction is directed to explore the possibility of improving the targets themselves. Thus, cost control ends when targets are achieved while cost reduction has no visible end. It Is a continuous process. The different between the two can be summarized as follows:
dfifferent cost control & reduction,cost concept and classification


Cost methods
Over many years, variable cost accounting methods have evolved to record the manufacturing costs to suit particular industries, and it is the need for the organization to establish a suitable cost accounting systems for their business to facilitate the recording and collection of cost, allocations, apportionment and absorption into products services, analysis and control of cost etc. but whatever the costing method in used, the basis costing principle relating to collection, analysis, allocation, apportionment and absorption is used. The costing methods are broadly categorized into two.
1. Specific order costing
2. Continuous operation costing
Specific order costing
Specific order costing methods are used by business organization, which involve in make/ assemble jobs or products to individual customer's specific orders. Cima defines septic order costing as "the basis of costing making method application where the work of services separate control as a job or business, each of which is authorized by a specific authorized by a special order or control." The specific order costing is further classification into (1) job costing, (2) contract costing and (3) batch costing.
Job costing
Where production is not highly repetitive and, in addition, consists of district jobs or lots so that material and labor costs can be identified by order number, the system of job costing is used. This method of costing is very common in commercial foundation and in plants making specialized industrial equipment. In all these case an accounts is opened for each job and all appropriate expenditure is charged thereto.
Contract costing
Contract costing does not in principle differ from job costing. A contract is a big job while a job is a small contract. The term is usually applied where at different sites large-scale contracts are carried out. In case of ship-building, building contractors etc., his systems of costing is used. Job or contract costing is also termed as "terminal costing".
Batch costing
Where orders or jobs are arranged in different bathes after taking into account the convenience of producing articles, batch costing is employed. Thus, in this method, the cost of a group of products is ascertained. The unit of cost is a batch of group of identical products, instead of a single job order or contract. The method is particular suitable for general engineering factories, which produces component in convenient economic batches and pharmaceutical industries.
Continuous operation costing
Where organizations, which involve in mass production of products, through continuous operations, which will then be sold from stock and will not be produced to the specific requirement of the customers continuous operating costing is used. Icma defines continues operation costing as (" the basic costing method applicable where goods or services result from a series of continuous or repetitive operations or processes to which costs are charged before being averaged over the units produced during the period").

The important feature of continuous operation costing is that, the process involves in production of identical units of output and total costs are divided by number of units produced to give the average cost per unit. The continuous operation costing is classified into:
1. Process costing including process of joint products and by-products.
2. Operation costing
3. Output costing, output
4. Services costing.
Process costing
It a product through different stages, each distinct and well defined, it is desired to know the cost of production at each stage. In order to ascertain the same, process costing is employed under which separate account is opened for each process. The system of costing is suitable for the extractive industries, e.g. chemical manufacturing, paints, foods, explosive, soap making etc.
Operation costing
Operation costing is a feature refinement of process costing. The systems is employed in industries where mass or respective production is carried out or where articles or components have to be stocked in semi finished stage, to facilitate the same as for process costing except that cost unit is an operation. The procedure of costing is broadly the same as for convenience of issue or late operation instead of a process. F or example, the manufacturing of handles for bicycles a number of operations such as those of cutting steel sheets into proper strips, mounding, machining and finally polishing. The cost of each one of these operations may be found out separately.
cost concept and classification, classification of costing method


Output costing
In this method cost per unit of output or production is ascertained and the amount of each element constituting such cost is determined. Where the products can be expressed in identical quantities units and where manufacture is continuous, this type of costing is applied. Cost statement or cost sheets are prepared under which the variable items of expenses are classified and the total expenditure is divided by total quantity produced in order to arrive at per units cost of production. The method suitable in industries such as brick making, collieries, flour mills, paper mills, cement manufacturing etc. it is also called unit or single costing.
Services costing
T he systems is employed where expenses are  incurred for provision of services such as those rendered by transport companies, electricity companies, hospitals etc. the total expenses regarding operation are divided by the units as may be appropriate and cost per units of services is calculated.
Costing techniques
Where the costing method is used, can be combined with the following costing techniques suitable to the organization. The costing techniques are categorized into absorption costing; direct costing, marginal costing and standard costing and activity based costing.
Absorption costing
The practice of charging all costs both variable and fixed to operations, products or process in termed as absorption costing. The institute of cost and work accountants of India defines absorption costing as " a method  of costing by which all direct cost and application overheads are charged to products or cost center for finding put the total cost of production. Absorbed cost includes production cost includes production cost as well as administrative and other costs."
Marginal/ direct costing
The particle of chagrin all direct costs to operation, process, leaving all indirect costs to be written off against in the period in which they arise, is termed as  direct costing.
It is a technique of costing in which allocation of expenditure to production is restricted to those expenses, which arise as a result of production i.e. direct material, labor, direct expenses and variable overheads. Fixed overheads are excluded on the group that in cases where production varies, the inclusion of fixed overheads may give misleading results. This technique is used in manufacturing industries with varying levels of output.
Standard costing
Standard costing is a system under which the cost of the product is ascertained in advance on the basis of certain per-determined standards. Taking the above example, the cost of product can be calculated in advance if one is in a position to estimate in advance the material, labor, and overhead costs that should be incurred over the product. All this required an efficient system of cost accounting. However, this system will not be useful if a vigorous system of controlling cost and keeping it up to standard cost is not in force. Standard costing is becoming more popular now-a day.
Activity based costing
It is a recent technique basically used for apportionment of overhead costs in an organization having products that differ in volume and complexity of production. Under this technique, the overhead costs of the organization are identified with each activity, which is acting as the cost driver i.e. the cause of incurred of overhead cost. Such cost drivers may be purchase orders, quality inspection, maintenance request, material receipts, inventory movements, power consumed, machine hour etc. having identified the overhead costs with each cost center; cost per unit of cost driver can be ascertained. The overhead costs can now be assigned to jobs on the basis of the number of activities required for their completion.
Classification of costs
The way of grouping the cost on the basis of some common characteristics and nature is called classification of cost. There are different costs of different purposes and no single cost concept is relevant in all situations.
The classification of cost is studied under the following basis:
cost classification, account classification, classification format


On the basis of element of cost
On the basis of element, cost can be divided into material, labor and expense. They have been mentioned in detail in the following:
classification of cost, element of cost, cost chart

a. Materials: materials are needed to produce goods or provide services. They can be classified into direct and indirect as given below:
Direct material: means the materials which from part of finished output and can be identified with the finished product easily. For example; plywood, adhesive, wood polish, nails etc. in case of manufacturing furniture, cost of cotton in case of manufacturing cotton yarn, cost of yarn in case of manufacturing cloth, cost of iron in case of manufacturing machinery etc. the main feature of direct material is that these enter into and form part of the finished product.
Indirect material cost: refers to the material cost, which cannot be allocated but can be apportioned to or absorbed by cost centers or cost units. These are the materials, which cannot be traced as part of the product and their cost is distributed amount the variable cost center or cost units on some equipment basis.
Example of indirect materials are coal and fuel for generating power, cotton waste, lubricating oil and grease used in maintaining the machinery, materials consumed for repair and maintenance work, dusters and brooms used for cleaning the factory etc.
b. Labor: labor I needed to convert the raw materials into finished products. It is also needed to supply the goods in the hand of intimated consumers used for cleaning the factory etc.
Paid for converting the raw material into finished, products or for altering the construction composition or condition of the product manufactured by an undertaking. For example, wages, paid for spinning yarm in case of spinning mills, wages paid for weaving cloth in case of cloth mills, wages paid to a mason for construction of a building contractor etc.
Indirect labor cost: refers to the labor cost or wages which cannot be allocated but can be apportioned to or absorbed by cost center by cost units. For example; salary paid to factory worker factory manager, salary paid to factory supervisor or foremen, salary paid to general manager or sales manager etc.
c. Other expenses: the expenses which are needed of production and distribution except material and labor fall into this category. they can be divided into two types as mentioned below:
Direct expenses: these costs are also called chargeable expenses. They are the expenses other than direct materials and direct labor cost, and can be identified with and allocated to cost centers or cost units. Direct expenses are those which are incurred for each unit of manufacture specifically and identifiable with them. For example, royalties paid on the basis of output, hire charged of especial plant or machinery, carriage and freight on direct purchase, impact duty and control paid on the purchase of imported direct materials, amount payable to sub contractor etc.
Indirect expenses: refers to the expenses, which cannot be allocated but can be apportionment to or absorbed by cost centers or cost units. For example; rent, taxes, and insurance of factory building, factory lighting, repairs to factory building, depreciation to plant and machinery, repairs to machinery, depreciation of office building. Depreciation and insurance of showroom building etc.a re known as direct expenses.
Different between direct and indirect cost
Direct costs are those costs which are directly involved in the process of manufacturing goods or providing services whereas indirect costs are not directly involved. Direct costs are the part of prime cost and direct costs are the part of overhead. The differences between these costs are given below:
direct expenses, indirect expenses, different between direct expenses and indirect expenses


 On the basis of function
Based on the functions, the costs can be classified into production cost, selling and distribution cost, and research and development cost.
a. Production cost: it included all directorial material, direct expenses and manufacturing expenses. It refers to costs concerned with manufacturing activity, which start with supply of material and ends with packing of the product.
b. Administration cost: it is incurred for carting the administrative function of the organization i.e. cost of policy formulation and its importation to attain the objectives of the organization, it should not be related to research, department, production, distribution or selling activities.  It is also called office cost.
c. Selling and distribution cost: the selling cost refers to the cost of selling function i.e. the cost of activities relating to created and stimulate demand for company's production and to secure order the distribution cost are incurred to make goods available to the customers. These include the cost of maintaining and creating demand of product, making the goods available in the hands of customers. They are also called total cost or cost of sales.
d. Research and development costs: the research cost is the cost of searching for new product, new manufacturing process improvement of existing products, process of equipment and the development cost is the cost of putting research result on commercial basis.
On the basis of behavior
On the basis of the behaviors in relation to changes in the column of activity, costs may be classified as, fixed cost, variable costs and semi-variable cost.
a. Fixed cost: The cost, whose total amount remains, to a certain capacity is called fixed cost. The level of production changes, but total amount of fixed cost requirement constant. Fixed cost is also called capacity cost, periodic cost, standing cost and burden cost.  If the level of production increases then per unit cost decrease and vice-versa, but total amounts of fixed cost remain constant. these cost increase with decrease in output and vice versa. Rent, deprecation and salary of permanent staff are the example of fixed assets.
fixed cost chart, fixed cost format, fixed cost pdf
Feature of fixed cost
i. The amount of fixed cost is never zero, even though the production is zero.
ii. The amount of fixed costs is constant up na certain range.
iii. Per unit fixed cost changes in opposite direction o production activity.
iv. Fixed costs are either capacity cost or periodic costs or the committed costs.
v. Fixed cost cannot be controlled in a short-term period and by the lower level responsibility
vi. Generally, fixed costs are unavoidable and uncontrollable costs.
b. Variable cost: The cost that changes proportionately with the change in output are knows as variable costs. An increase in the volume means a proportionate increase in the total variable costs linear relationship between volume variable costs. The per unit variable cost is always constant.

When production is zero, that total amount of variable cost is also zero. Variable cost is also called marginal cost, direct cost, pocket costs etc. direct materials costs, direct volume labor cost and direct expenses are the example of variable costs.
Variable cost, cost sheet format, Variable cost format,Variable cost pdf
Feature of variable cost
i. Per unit variable cost remains constant.
ii. When the production is zero, then the total amount of variable cost is also zero, but per unit variable cost will never be zero.
iii. Total amount of variable cost changes according to changes is level of production.
iv. Variable cost is a controllable cost.
different of variable cost and fixed cost, fixed cost format, variable cost format
c. Semi-variable cost: the costs which are neither perfectly neither variable nor absolutely fixed in relation to changes in variable, are called semi-variable or semi-variable costs. Neither total amount nor per unit semi variable cost remains constant. If the level of production increases than total amount of semi-variable cost also increase and per unit cost decrease but not proportionately. These costs have the characteristics of both fixed and variable costs. Electricity charges, telephone charges water supply charges are the examples of semi-variable costs. They are also called mixed costs, combined costs or semi-fixed costs.
semi-variable cost forma, semi-variable sheet, semi-variable cost chhart

Feature of semi-variable cost
i. Neither total amount nor per unit cost remains constant.
ii. Semi-variable cost can never be zero.
iii. When the levels of production increase the total amount of semi-variable cost also increase bet per unit semi-variable cost decrease and vice-versa.
On the basis of decrease-making
For desertion-making purpose, cost can be classification as follows:
a. Relevant and irrelevant cost: relevant costs are those are those costs which are affected by the action and decision of management. If managements change the devices costs will also changes. One the other hand, the cost which is not affected by the action and decision of the management are irrelevant costs. Irrelevant costs are ignored in decision-making. The example of such costs are given in the following table:
management decision format,management decision & relevant cost

b. Avoidable and unavoidable cost: avoidable costs are those costs that may be saved by adopting a given alternative whereas enviable cost control cannot. Therefore, only avoidable costs are relevant for decision-making purpose.  For example, a restaurant tries to take out certain item from the menu. Where the items are taken out, the direct material and other expenses can be saved. These are available costs, where Te salary of the cook remains constants. So, it is unavoidable cost. Some more example of these costs have been presented  below:
management decision & unavoidable cost, cost sheet format

c. Opportunity cost: an opportunity cost is that measures the opportunity that is lost or sacrificed. For example, leasing the office building and vehicle instead of using, itself, purchasing the Sami finished goods inserted of producing itself etc.
management decision, opportunity cost
d. Marginal cost: marginal cost is the additional cost to produce extra units of output. For example, it the total cost to produce 1,000 per unit is Rs. 3,000 and if we produce 1,001 units then total cost reaches to Rs. 3,025, here Rs. 25 is marginal cost.
e. Different cost: s different in cost between any two alternative is known as different cost. It may be increased or detrimental cost sure relevant for decision-making. Incremental costs are increase in cost due to change in decision whereas decremented costs are reduction in cost.
On the basis of controllability
An effective cost control required knowledge of cost controllability, controllability may be defined is terms of change or alternative of cost.
a. Controllable cost: the cost subject to control or substantial influence of particular manager or individual is called controllable costs. The cost that canon is changes or alternative by the action of a specific management is treated as controllable costs.
b. Uncontrollable cost: cost that is not subject to influence by the action of manager is called uncontrollable costs. These costs remain unchanged.
Segregation of semi-variable cost
Meaning and need of segregation of cost
The process of secreting the semi variable cost into variable and fixed cost is known as segregaration of semi variable cost. The reasons for the segremention of the semi variable cost mentioned below:

Segregation helps to calculate the selling prices of the extra output. The fixed cost does not increase with the extra output and the selling price is the total variable costs plus profit if any.
It also helps to control the variable cost. The semi-variable cost should be segregated to variable and fixed component since the fixed cost control be controlled.
It aids the management in decision making. Since most of the management decisions are based on marginal costing, it is necessary to separate the semi variable costs into fixed and cost variable parts.

Method of segregating semi variable cost
Semi-variable cost is segregated in two ways:
1. High-low point method
2. Least-square method
High low point methods (two point method)
To separate fixed and variable costs, this method compares the highest and lower activity level or volume and their costs. The variable cost rate is obtained by dividing the difference in costs by the different in the high and low level of activity or volume. This method is also called two point methods since the seating of mixed costs under it is based on two pint of units and costs. Hence the units' since the segregation of mixed costs under it is based on two points of unit and cost. Here the units represent units of output, labor hours and machine hours, the fixed cost is calculated by substracturing the total variable cost from the total cost at any level of activity.
a. First step: two different levels of output along with their total cost are selected. It is better to select the higher and lowest range.
b. Second step: the different in cost is divided by the different in output in output to calculate the cost per unit
Variable cost per unit (b) =(high cost-low cost)/(higher output or unit-low output or unit)
c. Third step: after calculating the variable cost per unit, the following formula is used to calculate the total fixed cost.
Fixed cost n (fc or a) = total mixed cost – variable cost per unit x output units
d. Final step: after calculating the variable cost per unit and total fixed cost, the cost at any level of output can be calculated using the following cost equation.
Cost equation:
Total cost = total fixed cost + total variable cost
Least-sequence method
Least sequence is also known as simple statistical analysis. It is an objective and sophisticated technique of segregating fixed and variable element of a semi-variable cost. It established a mathematical relationship between costs and volume and cost being depended upon volume. The least square principle a regression equation by managing the sum of the sequence of the vertical distances between the actually values and the predicted value of. Under, the mixed cost are separated into variable and fixed cost by following the below mentioned process.
1. What is meaning of cost?
Cost represents the resources that have been scarified in form of material. Labor and other direct and indirect expenses for a particular purpose. In other words, it is the amount of resources given up in exchange for same goods or services. The resources given up are generally in terms of money or it not in terms of money, they are always expressed in monetary terms.
The terms 'cost' itself has no significant meaning, therefore, it is always used with an adjective or phrase that conveys the meaning intended such as  rime direct, indirect ,fixed, variable,controllable,opportunity, different,magrginal, replacement and the like.
2. Classify cost on basis of elements.
On the basis of element, the cost can be divided into:
1. Materials: are needed to produce goods or provide services. it can be divided or provide services. It  can be divided into and indirect  materials direct material means the material which form part of finished output and can cost indemnified with finished product easily. Indirect material can be apportioned to or converted by cost centers or cost units.
2. Labor: in needed to convert the raw materials into finished product. If can also be divided into direct and indirect labor. Direct labor cost. Which is directly involved on production, indirect labor cost refers to the labor cost or wages, which cannot be allocated but can be apportioned to or absorbed by cost center or cost units?
3. Other expenses: are the needed in Corse of production and distribution except material and labor fall into this category.  Direct expenses are the expenses other than direct material and direct labor cost, which can be identified with and allocated to cost center or cost be allocated to cost center or cost units. Indirect expenses refer to the expenses, which cannot be allocated but can be apportioned to or absorbed by cost center or cost units.
4. Write any three differences between direct cost and indirect cost.
The different between direct and indirect costs are mentioned below:
1 Part of output: direct costs form a part of output whereas indirect cost direct cost dose not form a part of output.
2. Identification: the direct cost can be identification with the production but the indirect cost cannot be identification with the product.
3. Part of prime cost: Direct costs are parts of prime cost whereas indirect are parts of total cost.
4. Classify the cost on the basis of function.
Basis on the functions, the costs can be classification as under:
Production cost: it include all direct material, direct labor, direct expenses and manufacturing activity, which starts, which starts with supply of material and ends with primary packing of the product.
Administrative cost: it is incurred for carrying for carrying the administrative function of the organization i.e., cost of policy formulation and its implementation to attain the objectives of the organization.
Selling and distribution cost: the selling cost referees to the cost of selling function i.e., the cost of activities relating to create and stimulate demand for company's products and to secure orders. The distribution costs are incurred to make goods available to the customers.
Research and development costs: the researcher cost is the cost of searching for new products, new manufacturing process, improvement of exiting products, processes or equipment and the development cost is the cost of putting research result on commercial basis.
5. Classify the cost on the basis of behavior.
On the basis of behavior, cost can be classified as under:
Fixed cost: the costs, whose total amount remains constant, up to a certain capacity is called fixed cost. The level of production changes, but total amount of fixed cost. The level of production charge, but total amount of fixed cost remains constant. If the levels of production increase then per unit cost decreases and vice-versa, but total amounts of fixed cost remain constant. These costs remain fixed in total but the per unit cost changes with changes in output or sales.
Variable cost: the cost that changes proportionately with the changes in output is known as variable cost. An increase in the volume means a proportionate increase in the total variable costs and decrease in volume will lead to a proportionate decline in the total variable costs. The per unit variable cost is always constant.
Semi-variable cost: the cost which are neither perfectly variable nor absolutely fixed in relation to changes in volume, are called semi-variable or semi-fixed costs. Neither total amount nor per unit cost of semi-variable cost remains constant. If the levels of production increase than total amount of semi-variable cost also increase and per unit cost decrease but not proportionately.
6. What is meant by variable cost? Write the any three feature of it.
The cost that changes proportionately with the change in output is known as variable cost an increase in the volume means a proportionate increase in the total variable costs and decrease in volume will lead to a proportionate decline in the total variable costs.
i. Per unit variable costs remain constant.
ii. Total amount of variable cost changes according to changes in level of production.
iii. Variable cost is a controllable cost.
7. What do you mean by fixed cost? Mention its three features.
The costs, whose total amount remains constant, up to a certain capacity is called fixed cost. The levels of production changes, but total amount of fixed cost remain constant.
i. Per unit fixed cot charges in opposite direction of production activity.
ii. Fixed cost cannot be controlled in a short-term period and by the lower level responsibility
iii. Total fixed cost remains the same up-to a certain capacity level.
8. Write any three different between variable and fixed costs.
The different between fixed and variable costs are mentioned below:
i. Total cost: the total cost does not changes with the change in output but the total variable cost changes proportionately with the changes in output.
ii. Per unit cost: the per unit fixed cost changes with the change in output but per unit variable cost remains the same with any level of output.
iii. Controllability: Fixed costs are not controllable cost but the variable costs are controllable costs.
9. What is semi-variable cost? Explain with example.
The costs which are neither perfectly variable nor absolutely fixed in relation to changes in volume are called semi-variable or semi-fixed cost. Neither total amount nor per unit cost of semi-variable cost remains constant. If the levels of production increase than total amount of semi-variable cost also increase and per unit cost decrease but not proportionally. These costs have the characteristics of both fixed and variable costs.
Electricity charges, telephone changes, water supply charge are the example of semi-variable cost. They are also called mixed costs, combined costs or semi-fixed costs.
i. Neither total amount nor per remain constant.
ii. It can never be zero.
iii. When the level of production increase then its total also increase the level of production increase then its total also increase but per unit semi-variable cost decreases and vice-versa.
10. Explain about controllable and non-controllable costs with example.
i. Controllable cost: the cost subject to control or substantial influence of a particular manager or increase or individual is called controllable costs. The costs that can be charges or alternated by the action of a specific manager are traded as controllable costs like direct material and labor.
ii. Uncontrollable cost: cost that is not subject to influence by the action of manger is called uncontrollable costs. These costs remain unchanged. For example, rent insurance premium.
11. Why semi-variable cost needs to be segregated into variable and fixed cost for managerial decisions?
The reasons for the segregation of the semi variable cost are mentioned below:
a. Segregation helps to calculate the selling price of the extra output the fixed cost does not increase with the extra profit if any.
b. It also helps to control the variable cost. The semi-variable cost should be segregated to variable and fixed component since the fixed cost cannot controlled.
c. it aids the management in decision making. Since most of the managerial decisions are based on marginal decision are based of marginal costing. It is necessary decisions are based on marginal costing, it is necessary to separate the semi-variable cost into fixed and variable parts.
12. Write the importance of relevant and irrelevant cost for managerial decisions.
Relevant costs are those costs which are affected by the action and decision of management. It management changes the decision, these costs will also changes. On the order hand, the costs which are not affected by the action and decision of the management are irreverent costs. Irrelevant costs are ignored in decision-making. The management has to consider the relevant of cost in analyzing the cost and taking various decisions.
13. Different between relevant and irreverent costs with suitable examples.
The different between relevant and irrelevant cost are mentioned below.
i. Orientation: Relevant costs are future costs whereas irrelevant costs are historical cost. For example, the cost of raw material that incurs while extending the production capacity is relevant cost whereas the cost of clothing stock is irrelevant cost.
ii. Differential: Relevant costs are a different cost that emerges due to the decision of management but irrelevant costs are not differential costs.
14. Explain in brief about avoidable and unavoidable cost
Avoidable costs are those cost that may be saved by adopting a given alternative whereas unavoidable cost cannot be saved. Therefore only avoidable costs are relevant for decision-making purpose. For example, a restaurant tries to take out certain items from the menu. When the items are taken out, the avoidable cost, whereas the salary of the cooks remains constants, it is unable cost.




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