Chapter-2 Cost Concepts

Chapter-7 in text book Different types of Costs

Objectives

Product cost Period cost Absorbed cost Unabsorbed cost Fixed cost variable cost Direct cost Indirect cost Opportunity cost and Imputed cost Graphical representation of Fixed and Variable cost. Preparation of cost schedule

Product costs and Periods Costs

Product costs are costs which can be identified with goods produced for resale. Period costs are costs which are matched against the revenue of the current period.

Absorbed cost

Absorbed cost are costs absorbed by the revenues of the period in which product has been sold. Not in the period in which they are incurred.

Variable Costs

Items of cost that vary, in total, directly and proportionately with volume.

Volume refers to activity level. Examples:

Material costs varies with units sold. Electricity costs varies with production hours. Stationery and postage costs varies with number of letters written.

Fixed costs

Items of cost that, in total, do not vary at all with volume.

Examples:

Building rent, property taxes, management salaries.

Fixed cost per unit of activity decreases as the level of activity increases. Fixed costs are fixed for a range of activity and a limited period of time.
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Direct Cost Indirect cost

Direct costs are cost which can be identified logically and practically in their entirety to a particular department or product. Salary of a divisional manager is a direct cost if division happens to be a specific responsibility center. Chief executive salary is an indirect cost. 7

Opportunity costs and Imputed cost

A measure of the value that is lost or sacrificed when the choice of one course of action requires giving up an alternative course of action. Imputed cost are hypothetical cost that must be taken into consideration to make a correct decision. Not measured or recorded in accounting books. 8

Graphical illustration of total fixed cost and variable cost

Total cost

Units of production

Graphical illustration of per unit fixed and variable cost

Per unit cost

Volume of activity

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