Classification of Cost

Cost accounting involves collecting, classifying, recording and appropriate allocation of expenditure for determining the costs of products or services. After costs have been collected, these are properly classified for their identification with cost centers or cost units. Costs have different features or characteristics. Costs are grouped or classified according to their common characteristics. The process …

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Cost Center and Cost Unit

In cost accounting, costs are ascertained by cost centers and cost units. As such, it is necessary to know the meaning of these two terms. Cost Center Definition The Institute of Cost and Management Accountants, London has defined cost center as “a location, a person or an item of equipment (or group of these) in …

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Opportunity Cost

Definition An opportunity cost is a cost that results from a foregone opportunity. Opportunity cost is the concept used for the evaluation of alternative uses of resources. Decision makers select that alternative use of resources from which they expect the maximum net return. Opportunity cost is the net return that could be obtained from the second best …

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What are sunk costs?

Definition Sunk cost is the term used for a cost that has already been incurred and now cannot be avoided or changed and consequently it is irrelevant for the current decision-making situation. Explanation Sunk costs are those costs that have already been incurred. Sunk costs cannot be changed by a decision and hence they are …

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What is Imputed cost?

Definition Imputed Cost—is the cost allocated for resources or use of a service which does not involve a cash outlay. They are hypothetical costs and are not recorded in the books of accounts. There are those costs which do not involve cash outlay. These are not included in the cost accounts. But they are important …

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Difference between controllable and uncontrollable costs

All costs are controllable by someone in the organization, so the difference between controllable and uncontrollable costs depends upon a point of reference. Time also plays a part in controllability. Those costs which can be easily made easily and effectively controlled by someone made responsible for the same are called Controllable Costs whereas those which …

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Difference between direct costs and indirect costs

Direct Costs Definition Direct costs are the costs that can be conveniently and economically identified with some cost objectives or can be associated with some particular segments under consideration. Indirect Costs Definition Indirect costs are the costs that cannot be conveniently and economically identified with cost objectives and must be apportioned to the cost objectives …

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Difference between product costs and period costs

In a manufacturing organization, a distinction is made Between product costs and period costs. Product Costs Product costs (also known as inventoriable costs) are costs assigned to products. These costs are identified as being either direct materials, direct labor or factory overheads and are traceable or assignable to products. They become an expense only when the …

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Committed and Discretionary Fixed Costs

Fixed costs can be classified as “committed costs” or “discretionary costs” depending on their immediate impact on the organization. Committed Costs Committed fixed costs (also known as capacity costs) are costs that the company is required to incur, to maintain the current production capacity. These costs result from long-range decisions made by top management about …

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Semi-variable costs

Definition Some costs cannot be classified as either fixed or variable. These costs are known as semi-variable costs and they contain a fixed and a variable cost element.  These costs are also called mixed costs or semi-fixed costs. These costs may change but not in direct proportion to changes in activity. or Semi-variable cost is one …

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Variable Costs

Definition Total costs that change in direct proportion to changes in productive output or activity are Variable Costs. Typical variable costs include direct materials, direct labor, sales commissions and so on. or Variable cost is one which varies directly in proportion to every increase or decrease in the volume of output or production. It neither …

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Fixed Costs

Fixed Costs Definition Fixed costs are costs that remain constant in total within a relevant range of volume or activity. The concept of the relevant range is important here. Relevant range is the range of activity in which a company expects to operate. Or Fixed Cost is one which does not vary but remains constant …

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