accounting //cost accounting
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Types of costs in cost accounting
Types of costs in cost accounting
Ans:
Cost accounting is an accounting process that measures
and analyzes the costs associated with products, production, and projects, so that
correct amounts are reported on a company's financial statements. Cost
accounting aids in decision-making processes by allowing a company to
calculate, evaluate, and monitor its costs.
Below are
some of the types of costs used in cost accounting:
1.
Direct
Costs
Direct costs are related to producing a good or
service. A direct cost includes materials, labor, expense, or distribution
cost associated with producing a product. It can be easily traced to a product,
department or project. For example, Ford Motor Company manufactures cars and
trucks. A plant worker spends eight hours building a car. The direct
costs associated with the car are the wages paid to the worker and the parts
used to build the car.
2.
Indirect
Costs
Indirect costs, on the other hand,
are expenses unrelated to producing a good or service. An indirect cost
cannot be easily traced to a product, department, activity or project. For
example, with Ford Motor Company the direct costs associated with
each vehicle include tires and steel. However, the electricity used
to power the plant is considered an indirect cost because the electricity
is used for all the products made in the plant. No one product can be
traced back to the electric bill.
3. Fixed Costs
Fixed costs do not vary with the number of goods or services a company produces.
For example, suppose a company leases a machine for production for two years.
The company has to pay Rs. 2,000 per month to cover the cost of the lease. The lease payment is considered a fixed cost
as it remains unchanged.
4. Variable Costs
Variable costs fluctuate as the level of
production output changes, contrary to a fixed cost. This type of cost varies
depending on the number of products a company produces. A variable cost
increases as the production volume increases, and it falls as the production
volume decreases.
For example, a toy
manufacturer must package its toys before shipping products out to stores. This
is considered a type of variable cost because, as the manufacturer produces
more toys, its packaging costs increase. However, if the toy manufacturer's
production level is decreasing, the variable cost associated with the packaging
decreases
5. Operating Costs
Operating costs are expenses associated with
day-to-day business activities but are not traced back to one product.
Operating costs can be variable or fixed. Examples of operating
costs, which are more commonly called operating expenses, include rent and utilities for a
manufacturing plant. Operating costs are day-to-day expenses, but are
not classified as costs of producing the products. Investors can calculate
a company's operating
expense ratio, which shows how
efficient a company is in using their costs to generate sales.
6. Opportunity Cost
Opportunity cost is the benefit given up when one
decision is made over another. In other words, an opportunity cost represents
an alternative given up when a decision is made. This cost is, therefore, most
relevant for two mutually exclusive events. In investing, it's the
difference in return between a chosen investment and one that is passed up. For
companies, opportunity costs do not show up in the financial
statements but are useful in planning by management.
For example, if a company decides to buy a new piece
of manufacturing equipment rather than lease it. The opportunity cost
would be the difference between the cost of the cash outlay for the
equipment and the improved productivity versus how much money could have been
saved had the money been used to pay down debt.
7. Sunk Costs
Sunk costs are historical costs that have already been
incurred and will not make any difference in the current decisions by
management. Sunk costs are those costs that a company
has committed to and are unavoidable or unrecoverable
costs. Sunk costs (past costs) are excluded from future business
decisions because the costs will be the same regardless of the
outcome of a decision.
8. Controllable Costs
Controllable costs are expenses managers has control over and have the
power to increase or decrease.
For example, deciding on how supplies are
ordered or the payroll for a manufacturing company would be controllable, but
not necessarily avoidable.
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