Name: Keazor Adedolapo Samuel

Course: acc 102

Matric no:19/66mc095

Dept: Business Administration

What is Cost?

Definition: In business and accounting, cost is the monetary value that has been spent by a company in
order to produce something.

In a business, cost expresses the amount of money that is spent on the production or creation of a good
or service. Cost does not include a mark-up for profit.

From a seller’s point of view, cost is the amount of money spent to produce a product or good. If sellers
sold their goods at the same price as they cost to produce, then they would break even. This means that
they would not lose money on their sales, but their company would not make a profit either.

Therefore, the cost of a product from the buyer’s point of view can be called the price. This is the
amount charged for a product by the seller, and it includes both the cost to make the product and the
mark-up cost added by the seller to produce a profit.

Cost in accounting

In accounting, the term cost refers to the monetary value of expenditures for services, supplies, raw
materials, labor, products, equipment, etc. Cost is an amount that is recorded in bookkeeping records as
an expense

Cost accounting

Cost accounting is a process of recording, analyzing and reporting all of a company’s costs (both variable
and fixed) related to the production of a product. This is so that a company’s management can make
better financial decisions, introduce efficiencies and budget accurately. The objective of cost accounting
is to improve the business’s net profit margins (how much profit each dollar of sales generates).

Purpose of Cost Accounting

Cost accounting allows for the following:

COST ACCOUNTING ALLOWS A COMPANY TO BUDGET

When a business has a better idea of exactly how its money is being spent, it can better budget for the
future. A company’s accountant is typically already aware of the business’s fixed costs (utilities, rent,
property taxes, etc.), but it’s variable costs (such as labor and raw materials) change with output. Those
costs need to be tracked and estimated for, for the creation of the next budget. As well, the business
will want to know that the money being spent now is being done in ways that help maximize the
company’s profit.

COST ACCOUNTING ALLOWS A COMPANY TO BE MORE EFFICIENT

Typically, an examination of a company’s processes will result in ways to improve them. For instance,
maybe a company will discover it doesn’t need a ten-hour shift on a particular machine to produce a
product, maybe eight hours will do. Or that assigning three people to a production line has proven too
much, as only two are needed.

COST ACCOUNTING CAN MEAN MORE PROFIT

If a company makes its production processes more efficient, meaning it is producing the same output for
less, than it will make more money.

types of costs:

VARIABLE COSTS

These are costs directly related to the production of a product, such as material and labor costs. Often
these types of costs fluctuate.

FIXED COSTS

These are costs not directly related to production, but needed for production to happen, like utilities
and rent charges for a production facility. Often these types of prices do not fluctuate, or if they do,
they’re not by much.

Objectives of Cost Accounting

Cost control: The first function is to control the cost within the budgetary constraints management has
set for a particular product or service. It is essential since management allocates limited resources to
specific projects or production processes.

Cost computation: It is the source of all other functions of cost accounting as we can calculate the cost
of sales per unit for a particular product.

Cost reduction: Cost computation helps the company reduce costs on projects and processes. Reduction
in costs means more profits since the margin will naturally increase

Qualities of a good cost accounting information

Understandability

This implies the expression, with clarity, of accounting information in such a way that it will be
understandable to users – who are generally assumed to have a reasonable knowledge of business and
economic activity

Relevance

This implies that, to be useful, accounting information must assist a user to form, confirm or maybe
revise a view – usually in the context of making a decision (e.g. should I invest, should I lend money to
this business? Should I work for this business?

Consistency

This implies consistent treatment of similar items and application of accounting policies

Comparability

This implies the ability for users to be able to compare similar companies in the same industry group and
to make comparisons of performance over time. Much of the work that goes into setting accounting
standards is based around the need for comparability.

Reliability

This implies that the accounting information that is presented is truthful, accurate, complete (nothing
significant missed out) and capable of being verified (e.g. by a potential investor).

Objectivity

This implies that accounting information is prepared and reported in a “neutral” way. In other words, it
is not biased towards a particular user group or vested interest