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 may be measured and used for the purpose of cost control.
Example: the maintenance department, a delivery vehicle, a machine shop supervisor.
Relevant Cost
Costs that are specific to a management decision. Eliminates unnecessary data that could complicate the decision.
Example: when deciding whether to accept a one-off order, the extra material and labour it needs.
Irrelevant Cost
Costs, positive or negative, that are not related to a situation requiring a management decision.
Example: factory rent that stays the same whether or not the one-off order is accepted.
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.
Example: using a machine for product A means the contribution it would have earned on product B is given up.
Standard Cost
A carefully predetermined production or operating cost. Described as a predetermined cost, an estimated future cost, an expected cost, a budgeted unit cost, or a forecast cost, the “should be” cost.
Often an integral part of a manufacturer’s annual profit plan and operating budgets. A target cost that should be achieved.
Example: a standard of 2 kg of material at Rs. 50/kg and 0.5 hours of labour at Rs. 200/hour per unit.
Sunk Cost
A cost that has already been incurred and thus cannot be recovered. Not a future cost.
Example: money already spent on market research for a product that may or may not be launched.