Basic Cost Concepts

Basic Cost Concepts

Meaning of Cost Accounting – Cost accounting is concerned with
    ➢ recording, classifying and summarizing costs for determination of costs of products or services,
    ➢ planning, controlling and reducing such costs and
    ➢ furnishing of information to management for decision-making.
Cost accounting, thus, provides information to the management for decision of all sorts. It serves multiple purposes on account of which it is generally indistinguishable from management accounting.

Objectives of Cost Accounting
  1. Determining selling price
  2. Determining and controlling efficiency
  3. Facilitates the preparation of financial and other statements
  4. Providing basis for operating policy
        a. Determination of cost-volume-profit relationship
        b. Shutting down or operating at a loss
        c. Making or buying from outside suppliers
        d. Continuing with the existing plant and machinery or replacing them by improved and economic ones.

Concept of Cost
Cost – the amount of expenditure (actual or estimated) incurred on, or attributable to, a given thing.”
However, the term cost cannot be exactly defined. Its interpretation depends upon –
    ➢ The nature of the business, or industry, and
    ➢ The context in which it is used

Cost Classification
  1. Fixed, Variable and Semi-variable costs –
    a) Fixed Costs – costs which do not change with changes in volume of output/activity within a specified (relevant) range for a given budget period.
        There is an inverse relationship between volume and fixed cost per unit
        ↑ No. of Units produced → Fixed cost per unit ↓
        Hence, Fixed Costs are constant on aggregate basis but are variable on a unit basis.

    b) Variable costs – costs that tend to vary in direct proportion   or in a one-to-one relationship to changes in production activity, sales activity or some other measure of volume, within relevant range for a given budget... [continues]

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