Cost is the value of resources sacrificed to achieve a specific objective, such as manufacturing, acquiring a good, or providing a service. It is usually measured in monetary terms.
Cost accounting is a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services, in the aggregate and in detail.
Cost Unit
Unit of quantity of product, service, or time in relation to which costs may be measured or expressed.
Examples:
- Telecommunication
A minute. - Automobile production
A car. - Apartment complex
A single apartment.
Cost Centre
A location, person, or item of equipment, or group of these, for which costs are measured and used for the purpose of cost control.
A cost centre is a unit of cost accumulation, not of measurement. Costs are charged to a cost centre first, grouped under a common area of responsibility, then apportioned to cost units. Cost control compares a cost centre’s actual cost against a predetermined budget or standard.
Production Cost Centre
Carries out the central purposes of an organization.
Examples:
- Machining department in a factory.
- Assembly line in a car plant.
- Welding shop in a fabrication unit.
Service Cost Centre
Provide support that facilitates the activities of production departments.
Examples:
- Stores department issuing raw materials.
- Canteen serving factory staff.
- Personnel department handling recruitment.
Process Cost Centre
A cost centre for a distinct stage of a continuous production process, where costs accumulate for that stage before the output passes to the next.
Examples:
- Mixing department in a paint factory.
- Refining stage in an oil refinery.
- Bottling line in a beverage plant.
Relevant Cost
Costs that are specific to a management decision. Eliminates unnecessary data that could complicate the decision.
Examples:
- Extra material and labour needed to accept a one-off order.
- Additional electricity and overtime pay for an extra production shift.
Opportunity Cost
The cost of an alternative that must be given up in order to pursue a certain action. The benefits that could have been received by taking an alternative action.
Examples:
- Using a machine for product A forgoes the contribution product B would have earned on it.
- Studying for an exam forgoes the wages a part-time job would have paid.
Avoidable Cost
A cost that can be eliminated by not undertaking an activity. Relevant to a decision.
Examples:
- Extra material and labour needed for a one-off order, avoided if the order is declined.
- Overtime pay for an additional production shift, avoided if the shift doesn’t run.
Irrelevant Cost
Costs, positive or negative, that are not related to a situation requiring a management decision.
Examples:
- Factory rent that stays the same whether or not the one-off order is accepted.
- Salary of an existing supervisor, unchanged by the decision.
Sunk Cost
A cost that has already been incurred and thus cannot be recovered. Not a future cost.
Examples:
- Money already spent on market research for a product that may or may not be launched.
- Non-refundable advance paid on a lease, recoverable in no way once paid.
Standard Cost
Aka. predetermined cost, estimated future cost, expected cost, budgeted unit cost, or forecast cost. A carefully predetermined production or operating cost that should be achieved. Often an integral part of a manufacturer’s annual profit plan and operating budgets.
Examples: 2 kg of material at Rs. 50/kg and 0.5 hours of labour at Rs. 200/hour per unit.
