COST CONCEPTS

COST CONCEPTS

Cost is the measurement in

monetary terms of the resources
used for some purpose.

The purpose for which costs are

measured is called a “Cost
Objective”.
PRODUCT COST & PERIOD COST

Important for Income determination.

Variable costs:

Those that change with level of activity

Fixed Costs- Non Variable Costs

Committed
Discretionary

Semi-Variable costs
FOR CONTROL PURPOSES

1.Direct Costs

2. Indirect Costs

Not identifiable practically to a

product/dept.

--Not possible
--Not feasible
--Choose not to
Controllable costs
•In relation to a Responsibility centre
•Significant control
•For the time period under review

Uncontrollable costs
Have no control over
DIRECT COSTS

vs.

VARIABLE COSTS
COSTS FOR DECISION MAKING
Relevant and Irrelevant Cost

Relevant: Those that change as a

Result of decision under consideration

Irrelevant: Those unaffected by decision

Differential and Incremental
costs
Out of pocket costs
and
Sunk costs
Opportunity costs

The value of a product forgone to

produce or obtain another
product.
Standard Costs
Performance Expectations

-- Engineered Estimates
-- Observed Behaviour
-- Predicted Behaviour
-- Desired Behaviour
Marginal cost is the change in Total
Cost that arises when the quantity
produced changes by one unit.

It may change with volume, and so

at each level of production, the
marginal cost is the cost of the next
unit produced.
COST SHEET OF A PRODUCT

PURPOSE:
1.To find profitability of a product
2. To fix selling price
3. To control cost
4. To plan cost of a new product
Includes:

1.Production Cost
a. Direct cost (PRIME COST)
b. Indirect costs (PRODUCTION OVERHEADS)

1.Administration Overheads
2. Selling & Dist. Overheads

Normally do not include Financial overheads.

Cost : All expenditure incurred to bring
goods or services to the present
condition or location.

Implies:
a. All expenditure is not cost
b. Cost calculated to a specific reference
point
c. Change in condition or location
Basics to remember:

1.Raw material Stock – To be valued at

cost:
i.e. Supplier price + transport +
loading/unloading + transit insurance +
import duties + octroi + godown charges
in transit.
2. Finished goods stock – To be valued at :
Raw material cost + wages+ Factory
expenses (water, electricity, Rent,
Depreciation, Factory taxes) + Packing +
Excise duty.
3. Semi Finished Goods : To be valued at

Raw Material + wages + Factory

expenses on Proportional basis.
Direct Material + Direct Labour = PRIME COST
Prime Cost
+
Production overhead
+ = WORKS COST
Op stock WIP
--
Cl Stock WIP
Works Cost

+ = COST OF PRODUCTION

Admin. Overhead
Cost of Production
+
Op Stock Finished Goods = COST OF
-- GOODS SOLD
Cl Stock Finished Goods
Cost of goods sold
+ = COST OF SALES
Sales Overhead
Cost of Sales

+ = SALES

Profit
COST-VOLUME-PROFIT ANALYSIS

For Profit planning

Sample Questions

1. At what sales volume will I get x profit ?

2. If I increase volume, how will my profit look ?
3. What additional sales are required to make
good x % of reduction in price to keep profit same ?
1. Effect on profit if Fixed costs increase?
2. How much does volume have to increase to keep
profit same with increase in fixed costs?
BREAK EVEN ANALYSIS

The sales volume at which total

revenue equals total cost resulting in
no profit and no loss.
 BEP IN UNITS

FIXED COST .
CONTRIBUTION MARGIN PER UNIT

CONRTIBUTION = SALES PRICE –

UNIT VARIABLE COST
 BEP IN VALUE

FIXED COSTS .
PROFIT VOLUME RATIO

P/V = CONRTIBUTION PER UNIT

SALES PRICE PER UNIT