Cost- Principles of Accounting

Topics: Costs, Variable cost, Cost Pages: 23 (7133 words) Published: March 9, 2013
What Does Historical Cost Mean?
A measure of value used in accounting in which the price of an asset on the balance sheet is based on its nominal or original cost when it was acquired by the company. The historical-cost method is used for assets in the United States under generally accepted accounting principles (GAAP).

Cost concepts and terms

1. Cost

The amount of expenditure (actual or notional) incurred on or attributable to a specified article, product or activity is referred to as cost.
2. Cost object

Anything for which a separate measurement of cost is desired is referred to as a Cost Object. Example of cost object includes a product, a service, a project, a customer, a brand category, a department, a program etc.

3. Direct costs

Costs that are related to the cost object and can be traced in an economically feasible manner are referred to as Direct Costs.
4. Indirect costs

Costs which are relatable to the cost object but cannot be traced in an economically feasible manner are referred to as Indirect Costs.
5. Standard cost

A pre-determined cost which is determined form the management’s expected standard of efficiency operation and there relevant necessary expenditure. It may be used as a basis for price fixing and for cost control through variance analysis.

6. Marginal Cost

Marginal cost refers to the amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unit.
7. Cost of sales

Cost of Sales is the aggregate of the cost which are attributable to the sales made.
8. Cost unit

Cost unit refers to a unit of product, service or time or a combination of these in relation to which costs may be ascertained or expressed. Cost units are usually the units of physical measure like number, weight, area, volume, length, time and value.

9. Profit Centre

The centres which have the responsibility of generating and maximising profits are called profit centres.
10. Investment Centre

Those centres which are concerned with earning an adequate return on investment are called investment Centre.
11. Cost allocation

Cost Allocation is defined as the assignment of indirect Costs to the chosen cost object.
12. Cost absorption

Cost absorption is defined as the process of absorbing all indirect costs allocated to or apportioned over a particular cost centre or production department by the units produced.

Management accounting .com.:
(A)Cost Classification for Decision Making or Decision Making Costs

Costs can be classified for decision making. Costs are important feature of many business decisions. For the purpose of decision making, costs are usually classified as differential cost, opportunity cost, and sunk cost. It is essential to have a firm grasp of the concepts differential cost & differential revenue, opportunity cost, and sunk cost. Differential Cost and Differential Revenue:

Definition and Explanation of Differential Cost and Differential Revenue: Decisions involve choosing between alternatives. In business, each alternative will have certain costs and benefits that must be compared to the costs and benefits of the other available alternatives. A difference in cost between any two alternatives is known as differential cost. A difference in revenue between any two alternatives is known as differential revenues. Differential cost includes both cost increase (incremental cost) and cost decrease (decremental cost). In general the difference (cost and revenue) between alternatives are relevant in decision making. Those items that are the same under all alternatives can be ignored. The accountant's differential cost concept can be compared to the economist's marginal cost concept. In speaking of changes in cost and revenue, the economists employ the term marginal cost and marginal revenue. The revenue that can be obtained from selling one more unit of product is...
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