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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Margin of Safety

Margin of Safety (MOS) Definition The difference between the actual sales volume. and the break-even sales volume is called the margin of safety. It represents that proportion of the current sale which determines the profit of the firm. Formula to calculate the Margin of Safety Margin of Safety = Actual sales volume – Break-even sales …

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Graphical representation of break-even analysis

Break-even chart Cost-Volume-Profit (or Break-Even) relationships can also be portrayed through the use of graphs. This method has the advantage of showing cost-volume-profit relationships over a range of sales. The graphic analysis permits managers to observe areas of profit or loss that would occur for a broad range of sales activity. The data from the …

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Contribution Margin

What is the Contribution Margin? The contribution margin (C.M.) is the amount of revenue in excess of variable costs. To cover the company’s fixed cost, this portion of the revenue is available. And after all fixed costs have been covered, this provides an operating profit. Hence contribution is a profit measure, although an incomplete one, …

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Break-Even Point

Break-even Point – Definition The break-even point is that volume of activity at which total revenue equals the sum of all variable and fixed costs. The activity can be expressed in unit or in dollar sales. This break-even is the point at which there is no profit or loss. Break-even Point is a point where …

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Contribution margin ratio

Definition of Contribution Margin Ratio The total contribution margin divided by the total sales is equal to Contribution margin ratio. It is also known as the profit-volume ratio (p/v ratio). Explanation The Contribution Margin, as we know, is the amount of revenue in excess of variable costs. Contribution margin may be expressed on per unit basis …

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What is cost?

Cost Definition Cost is the sacrifice made, usually measured by the resources given up, to achieve a particular purpose. A sacrifice made in order to obtain some goods or services Costs are not always Expenses. Some costs are Assets, other costs are Expenses Expenses are Expired (Used up) Costs Eventually, costs will become expenses. Explanation …

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Cost accounting formulas

The following formulas can be used to find out different costs. Prime cost = Direct material consumed + Direct labour Conversion Cost = Direct material + Factory overhead Factory cost = Direct material + Direct labour + Factory overhead Cost of Goods Manufactured = Direct material consumed + Direct labour + Factory overhead + Opening …

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Cost of goods manufactured statement

Cost of goods manufactured is the total cost incurred by a manufacturing company to manufacture product(s) during a particular period of time. Format: Example: John Manufacturing Company, a manufacturer of soda bottles, had the following inventory balances at the beginning and end of 2018. During 2018, the company purchased $1 000 000 of raw material and …

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Cost of goods sold statement

It is the expense measured by the cost of the finished goods sold during a period of time. Example: John Manufacturing Company, a manufacturer of soda bottles, had the following inventory balances at the beginning and end of 2018. During 2018, the company purchased $1 000 000 of raw material and direct labor incurred of $1 …

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Job Costing

What is Job Costing? – Definition Job costing is a system in which costs are assigned to batches or job order of production. Job cost sheet has to be made under this costing system. Job costing is the method of costing which applied to ascertain the costs of specific jobs or work -orders which are treated …

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Job cost sheet

Definition and explanation Job cost sheet is a complete sheet, which is prepared by the factory accountant for every job started in the factory. It is a primary document for accumulating all costs related to a particular job. In a job order costing system, we maintain a job cost sheet for each job. It tells …

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Activity-based costing (ABC)

Activity based costing (ABC) – Definition An activity-based costing system (also known as ABC System) is a two-stage procedure for assigning overhead costs to products, which focuses on the major activities performed in the production process. Activity-based costing is a costing method that identifies activities in an organization and assigns the cost of each activity …

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Computation of unit cost under activity-based costing

Activity-Based Costing Activity Based Costing uses cost drivers to assign the costs of resources to activities and unit cost as a way of measuring output. Steps to implement Activity-based Costing (ABC) The four steps to activity-based costing ABC implementation 1. Identify activities of activity-based costing Perform an in-depth analysis of the operating processes of each …

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Difference between actual costing and normal costing

Normal Costing: Normal costing refers to a product costing system where actual direct material, actual direct labor and applied manufacturing overhead costs are added to work in process inventory. Actual Costing: Actuar costing system refers to a product costing system where actual direct material and actual direct labor and actual manufacturing overhead costs are added …

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What is Process costing?

Process Costing – Definition A process costing system accumulates the costs of a production process and assigns them to the products that comprise the organization’s output. Production report has to be made under process costing system. The method of process costing is applied to ascertain the cost of production in those industries, where a product …

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Equivalent units of production

Definition of Equivalent units of production A department’s output is always stated in terms of equivalent units of production. Equivalent units can be defined as the number of units that could have produced given the total amount of manufacturing effort expended for the period under consideration. Explanation The problem of work-in-progress in process industries is …

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Joint product costing

What is meant by Joint Products? – Definition When two or more products must be produced together, they are called joint products. The purpose of this article is to describe the explanation, examples, and accounting techniques for costing joint products. Explanation Joint products are produced simultaneously by a common process or series of processes, with …

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Joint cost allocation methods

The allocation of the joint production cost incurred up to the split off point can be made by: The quantitative or physical unit method based on some physical measurement unit such as weight. linear measure or volume. The weighted average method, based on predetermined standard or index of production. The market or sales value method …

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By-products

Definition and Explanation The term by-products is generally used to denote one or more products of relatively small total value that are produced simultaneously with a product of greater total value. The product with the greater value, commonly called the “main product”, is usually produced in greater quantities than the by-products. Ordinarily, the manufacturer has …

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