What is Cost concept together with segregation?
Cost concept together with segregation
Concept of cost
The term "cost" has a diversity of interpretations inward mutual use. In ordinary languages, it may hateful price. The Oxford lexicon defines "cost" every bit the toll for something. But inward cost accounting, it is considered unlike from price.
In cost accounting cost is the amount of resources given upwards inward central for roughly goods or services. The resources given upwards are mostly inward terms of coin or if non inward term of coin they are ever expressed inward monetary units. It consists of all the expenses incurred inward producing a commodity or executing a contract. It signifies an expenditure or monetary outlay to secure roughly benefit.
The term 'cost' itself has no important meaning, therefore, it is ever used with an describing word or phrase that covers the pregnant interred, such every bit prime, direct, indirect, fixed variable, controllable,oppertinity, differential, marginal, replacement together with the like. Such description implies a for sure characteristic, which is of import inward computing, measuring together with analyzing the cost.
According to The institute of cost together with direction Accountants (ICMA), London, "cost tin john live on defined every bit the amount of expenditure (actual or notional) incurred on or attributable to a given thing."
According to Horngren, sundem together with Stratton, "cost may live on defined every bit the sacrifice or giving upwards resources for a exceptional purpose. Cost is oftentimes measured past times monetary units that must live on paid for goods together with services."
From the inward a higher house definitions, it is clear that cost is the expenditures or sacrifice made for goods or services.
Items relating to cost concepts
Some of the terms relating to the cost concepts are mentioned below:
Expenses
When the cost is recognized together with recorded after the gain goodness has been obtained, it Is called expenses. To uncovering out internet income, it appears inward the turn a profit together with loss occupation organisation human relationship or income tilt a given current every bit deduction. It is matched against the revenues to calculate the turn a profit or loss of a for sure period. It represents sacrifice or resources for an economical benefit.
Expenses are properly deducted from revenues. Therefore, expenses are also known every bit expired costs together with are incurred together with totally used upwards inward generation of revenue. Examples of expired costs are cost of goods sold expense, selling together with administrative expenses. Expenses demand non necessarily have got to live on paid inward cash immediately; fifty-fifty a hope to pay could live on made for the benefits obtained. The cost that cannot live on deducted from revenue inward an expense non a cost.
Loss
If benefits are derived from an expired cost, it is called a profit. Its only reverse, if no gain goodness is received from the cost incurred or if at that spot is no gain goodness accrued, the cost becomes a lost cost or loss. If allows refers to the amount of divergence betwixt the expenses together with revenues i.e., when expenses overstep revenues for an accounting period. Influenza A virus subtype H5N1 loss is related to the internet consequence of an unfavorable transaction, lawsuit or province of affairs non arising from a normal occupation organisation activity. If it tin john live on established that at that spot is no matching economical gain goodness for cost, it is known every bit loss. If tin john also live on said that, loss stand upwards for reduction inward ownership equity other than from withdrawal of uppercase for which no compensating value is received e.g., devastation of holding past times fire.
Cost center
Cost centre is a location, mortal or item of equipment for which cost may live on ascertained together with used for the purpose of cost control. ICMA defines cost centre every bit "a production or service, function, activity or item of equipment whose costs may live on attributed to cost units. Influenza A virus subtype H5N1 cost centre is the smallest organisation sub-unit for which separate cost allotment is attempted." from business office indicate of view, a cot centre may live on relatively tardily to found because a cost centre is whatever unit of measurement of the organisation to which costs tin john live on separately attributed. Influenza A virus subtype H5N1 cost centre is an private activity department, a machine or grouping of machines inside a subdivision or a piece of work grouping is considered every bit cost center.
Profit center
Influenza A virus subtype H5N1 turn a profit centre is whatever sub-unit of an organisation to which both revenues together with costs are assigned, so that the responsibleness of a sub-unit may live on measured. Profit centre is a segment of the occupation organisation entity past times which both revenues received together with expenditures incurred are controlled, such revenues together with expenditures beingness used to revalued segment performance. In turn a profit center. Both input together with output are capable of direction inward fiscal inward fiscal terms together with it provide to a greater extent than effective easement of the manager's performance since both together with revenues are measured inward monetary terms.
Cost unit
Influenza A virus subtype H5N1 cost unit of measurement Is a unit of measurement of production or unit of measurement of services tow which costs are ascertained past times 'means of allocation, storey together with absorption. Chartered institute of direction accountants (CIMA), London defines cost unit of measurement every bit "a quantitative unit of measurement of production or service inward relation to which costs are ascertained." It is a unit of measurement of quantity of product, service or fourth dimension or a combination of these inward relation to which costs are expressed or ascertained. For example, specific job, contract, unit of measurement of production similar fabrication job, route constrain contract, an automobile truck, a table, G bricks etc.
Influenza A virus subtype H5N1 turn a profit centre is whatever sub-unit of an organisation to which both revenues together with costs are assigned, so that the responsibleness of a sub-unit may live on measured. Profit centre is a segment of the occupation organisation entity past times which both revenues received together with expenditures incurred are controlled, such revenues together with expenditures beingness used to revalued segment performance. In turn a profit center. Both input together with output are capable of direction inward fiscal inward fiscal terms together with it provide to a greater extent than effective easement of the manager's performance since both together with revenues are measured inward monetary terms.
Cost unit
Influenza A virus subtype H5N1 cost unit of measurement Is a unit of measurement of production or unit of measurement of services tow which costs are ascertained past times 'means of allocation, storey together with absorption. Chartered institute of direction accountants (CIMA), London defines cost unit of measurement every bit "a quantitative unit of measurement of production or service inward relation to which costs are ascertained." It is a unit of measurement of quantity of product, service or fourth dimension or a combination of these inward relation to which costs are expressed or ascertained. For example, specific job, contract, unit of measurement of production similar fabrication job, route constrain contract, an automobile truck, a table, G bricks etc.
Cost driver
Influenza A virus subtype H5N1 cost driver is whatever factor that influences costs. Influenza A virus subtype H5N1 modify inward the cost driver volition Pb to a modify inward the full cost of a related cost object. Examples of cost drivers are; number of advertisements, number of sales personal, number of products produced etc. whatever modify made inward whatever of the driver's causes a modify inward the full cost. It is for the direction to run across whether whatever modify inward whatever cost driver is to made or non keeping inward persuasion cost gain goodness analysis of the modify inward the cost driver.
Importance of cost
It has already been said that the term cost refers to the monetary value of an effort or a resource. It is the value of coin that is used to create something's. It is an of import chemical element inward data's occupation organisation world, therefore, if has the next importance:
1. Preparation of occupation organisation plan: a occupation organisation innovation provides the direction for the occupation organisation together with cost is an importance chemical element for it. Without cost, a occupation organisation innovation incomplete.
2. Achievement of occupation organisation goal: the principal objective of every occupation organisation concern is to maximize profit. In this regard, cost helps to accomplish this objective, because minimizing the cost; a occupation organisation tin john maximize its profit.
3. Helps inward competition: by putting push clit per unit of measurement area on selling price, cost helps to capture the marketplace of cost witting customers.
4. Fixation of selling price: selling toll is the amount of cost together with desirable profit. Therefore, it helps to create upwards one's heed the selling toll of the product.
5. Evaluation of performance: performance of the occupation organisation is mostly evaluated on the ground of profitability together with without cost, profitability cannot live on measure. Therefore, performance of the occupation organisation of the occupation organisation tin john live on judged on the ground of cost too.
Costing methods
Over many years, diverse cost accounting methods have got evolved to tape the manufacturing costs to suit exceptional industries, together with it is the demand for the organisation to found a suitable cost accounting scheme for their occupation organisation to facilitate the recording together with collection of costs, allocation, apportionment together with absorption into products together with services, analysis together with command or, costs etc. the costing method are broadly categorized into two.
1. Specific gild costing
2. Continuous performance costing
Specific gild costing
Specific gild costing method are used past times occupation organisation organization, which involve making/ assembling/constructing jobs or products to private customer's specific orders. CIMA defines specific gild costing every bit "the basic costing method applicable where the piece of work consists of separate contracts, task or batches, each of which is authorized past times a special or contract." The specific gild costing is farther classified into (i) task costing, (ii) contract costing together with (iii) batch costing.
Job costing
Where productions is non highly respective and, inward addition, consist of distinct jobs or lots so that stuff together with labour costs tin john live on identified past times gild number, the scheme of task costing used. This method of costing is really mutual inward commercial foundation together with inward plants making specialized industrial equipments. In all these cases an accounts is opened for each task together with all appropriate expenditures is charged thereto.
Contract costing
Contract costing does non inward regulation unlike from task costing. Influenza A virus subtype H5N1 contract is a large task spell a task is a modest contract. The term is normally applied where at unlike sites large-scale contracts are carried out. In instance of ship-building contractors etc., this scheme of costing is used. Job or contract costing is also termed every bit "terminal costing".
Batch costing
Where orders or jobs are arranged inward unlike batches after taking into occupation organisation human relationship the convenience of producing articles, batch costing is employed. Thus, inward this method, the cost of a grouping of products is ascertained. The unit of measurement of costs is a batch of grouping of identical products, instead of unmarried task or contract. The method is peculiarly suitable for full general technology scientific discipline factories, which production element inward convenient economical batches together with pharmaceutical industries.
Continues performance costing
When organizational involve inward volume production of products non the specific requirement of the customers together with sell their products from their sticks, together with so such organizations usage continuous operating costing. ICMA defines continuous performance costing every bit "the basic costing method applicable hewer goods or services outcome from a serial of continuous or representative operations or processes to which costs are charged before beingness averaged over the unit of measurement produced during the period.'
The of import characteristic of continuous performance costing is that, the physical care for involves inward production of identical units of output together with full costs are divided past times number of units produced to give the average cost per unit. The continuous performance costing is calcified into:
• Process costing
• Operation costing
• Output costing, and
• Service costing.
Process costing
If a production passes through unlike stages, each distinct together with good defined together with it desired to know te cost of production at each stage, them it is called physical care for costing. In other words, physical care for costing is employed nether which separate occupation organisation human relationship is opened for each process. The scheme of costing is suitable for the attractive industries, e.g., chemic manufacture, paints, foods, explosives, lather making etc.
Operation costing
Operation costing is a farther refinement of physical care for costing. The scheme is employed inward industries where volume or respective production is carried out or hewer articles or components have got to live on stocked inward semi-finished stage, to facilitate the execution of special orders, or for convenience of number or afterwards operations. The physical care for of costing inward broadly the same every bit for physical care for costing except that cost unit of measurement is an performance instead of a process. For example, the manufacturing of handles for bicycles involves a number of operations such every bit those of cutting steel sheets into proper strips, moldings, machining together with in conclusion polishing. The cost of each i of these operations may live on found out separately.
Output costing
In this method cost per unit of measurement of output or production is ascertained together with the amount of each chemical element constituting such cost is determined. Where the products tin john live on expressed inward identical quantitative units together with where industry is continuous, this type of costing is applied. Cost statements or cost sheets are prepared nether which the diverse items of expenses are classified together with thee full expenditure is divided past times full quanlitity produced inward gild to brand it at per unit of measurement cost of production. The method is suitable inward industries such every bit brick making, collieries, flourmills newspaper mills, together with cement manufacturing etc. it is called units or unmarried costing.
Service costing
The systems is employed where expense are incurred for provision of services such every bit those rendered past times carry companies, electricity companies, hospitals etc. the full expenses regarding performance are divided past times the units every bit may live on appropriate together with cost per unit of measurement or service is calculated.
Costing techniques
The costing techniques are categorized into adsorption costing, direct costing/marginal costing, touchstone costing together with Activity based costing.
Absorption costing
The do of changing all costs both variable together with fixed to operations, products or processes is termed every bit absorption costing. The institute of Cost together with works accountants of India defines absorption costing every bit "a method of costing past times which all direct costs together with applicable overheads are charged to products or cost centre for finding out the full cost of of production. Absorbed cost included production cost every bit good a administrative roughly other costs."
Marginal/ direct costing
The do of charging all direct costs to operation, physical care for or products, leaving all indirect costs to live on written off against turn a profit inward the current inward which they arise, is termed every bit direct costing.
It is a techniques of costing inward which allotment of expenditures to production is restricted to those expenses, which arise every bit a outcome of production i.e. direct material, direct labor, direct expenses together with variable overheads. Fixed overheads are excluded on the dry soil that inward instance where production various, the includision of fixed overhead may gives misleading results. This technique is useful inward manufacturing industrities with varying levels of output.
Standard costing
Standard costing is a scheme which the cost of the production is ascertained inward advance on the ground of for sure pre-determined standards. Taking the inward a higher house example, the cost of production tin john live on calculated inward advance if i is inward a seat to approximate inward advance the materials, labor, together with overhead costs that should live on incurred over the product. All this requires an efficient scheme of cost accounting. However, this scheme volition non live on useful if a vigorous scheme of controlling cost together with keeping it upwards to touchstone cost is non inward force. Standard costing inward becoming mere together with pop at nowadays days.
Activity based costing
It is a recent techniques bestially used for apportionment of overhead costs inward an organisation having products that differ inward book together with complexity of production. Under this technique, the overhead costs of the organisation are indentified with each activity, which is acting every bit the cost driver i.e. the crusade of incurrence of overheads cost. Such cost drivers may live on purchase orders lineament inspections, maintained request, stuff receipts, inventory movements, might consumed, machine hr etc. having identified the overhead costs with each cost center, cost per unit of measurement of cost driver tin john live on ascertained. The overhead costs tin john at nowadays live on assigned to jobs on the ground of the number of activities required for their completion.
Classification of costs
The way of groping the costs on the ground of roughly mutual characteristic together with nature is called classification of cost. There are unlike costs for unlike purposed together with no unmarried cost concept is relevant inward all situations. Therefore, costs tin john live on classified on the next bases:
• On the ground of chemical element of cost
• On the ground of functions
• On the ground of behavior
• On the ground of decision-making
• On the ground of controllability
On the ground of chemical element of cost
On the ground of element, cost tin john live on divided into material, labor together with expenses. They have got been mentioned inward details inward the following.
a. Materials: materials are needed to gain goods or provide services. Material tin john live on classified into exceptional inward the following.
• Direct material: means the materials which shape part of finished output together with tin john live on indentified with the finished production easily. For example; wood, plywood, adhesive, wood polish, nails etc. inward instance of manufacturing furniture, cost of cotton fiber inward instance of manufacturing cotton fiber yarn, cost of yarn inward instance of manufacturing cloth, cost of atomic number 26 inward instance of manufacturing mechanism etc. the principal time to come of direct materials is that these larn inward into together with shape part of the finished product.
• Indirect stuff cost: refers to the stuff costs, which cannot live on allocated but tin john live on apportioned to or absorbed past times cost centers or cost units. There are the materials, which cannot live on traced every bit part of the product, together with at that spot is distributed with the diverse cost centre or cost units on roughly equitable basis.
b. Labour: labour is needed to convert the raw materials into finished products. it is also needed to render the goods inward the manus of ultimate consumer. It tin john farther live on divided into 2 types every bit given below:
• Direct labour: is the workforce, which is direct involved on production. It refers to labour cost, which tin john live on identified with together with allocated to cost units. It includes 2 remuneration paid for converting the raw stuff into finished products or for altering the conduction, composition or status of the production manufactured past times an undertaking. For example, reward paid for spinning yarm is instance of spinning mills, reward paid for waving cloth inward instance of cloth mills, reward paid to a bricklayer for structure of a edifice past times a edifice contractor etc.
• Indirect labor cost: refers to the labour cost or wages, which cannot live on allocated but tin john live on apportioned to or absorption past times cost centers or cost units. For example, salary paid to manufacturing flora manager, salary paid to manufacturing flora supervisor or foremen, salary paid to full general director or sales director etc.
c. Other expenses: the expenses which are needed inward course of written report of production together with distribution except stuff together with labour autumn into this category. They tin john live on divided into types every bit mentioned below:
• Direct expenses: these costs are also called chargeable expenses. They are the expenses other than direct stuff together with direct labour cost, together with live on indentified with together with allocated to cost enters or cost units. Direct expenses are those which are incurred for each unit of measurement of industry specifically together with identifiable with them. For example, royalties paid on the ground of output, hire changes of special flora or machinery, wagon together with freight on direct stuff purchases, import duty together with octopi paid on the purchases of imported direct materials, amount payable to such-contractor etc.
• Indirect expenses: refer to the expenses, which cannot live on allocated but tin john live on apportioned to or absorbed past times cost centers or cost units. For example, rent rates taxes together with insurance of manufacturing flora building, manufacturing flora lighting, repairs to manufacturing flora edifice depreciation to flora together with machinery, repairs to machinery, depreciation together with insurance of business office building, depreciation together with insurance of showroom edifice etc. are known every bit indirect expenses.
Differences betwixt direct together with indirect cost
Direct costs are those which are direct involved inward the press of manufacturing goods or providing services together with larn the part of output whereas indirect costs gain non larn the part of output. Direct costs are the part of prime number costs together with indirect costs are the part of overhead. Such differences betwixt these costs are given below:
On the ground of functions
Based on the functions, the costs tin john live on classified into production cost, management cost, selling together with distribution cost, together with interrogation together with evolution cost.
a. Production cost: it included all direct materials, direct labour, direct expenses together with manufacturing expenses. It refers to costs concerned with manufacturing activity, which starts with render of stuff together with ends with primary packing of the product.
b. Administration cost: it is incurred for carrying the administrative business office of the organisation i.e., cost of policy formulation together with its implementation to attain the objective of the organization. T should non live on related to research, development, production, together with distribution or selling activiitity. It is also called business office cost.
c. Selling together with distributions cost: the selling cost refers to the cost of selling functions I.e., the cost of activities relating to create together with have demand for company's products together with to secure orders. The distribution costs are incurred to brand goods available to the customers. These costs incurred the cost of maintaining together with creating demand of product, making the goods available inward the hands of customer.
d. Research together with evolution costs: the interrogation cost is the cost of searching for novel products, novel manufacturing process, improvement of exiting products, processes or equipment together with the evolution cost is the cost of putting interrogation outcome on commercial basis.
On the ground of Behavior
On the ground of the demeanor inward relations to charges inward the book of activity, costs may live on classified as, fixed costs, variable costs together with semi-variable cost.
a. Fixed cost: the costs, whose full amount remains constant, upwards to an for sure capacity is called fixed cost. The degree of production changes, but full amount of fixed cost remains constant. Fixed cost is also called capacity cost, periodic cost, standing cost together with burden cost. If the degree of production growth together with so per unit of measurement cost decrease together with vice-versa, but full amount of fixed cost stay constant. These costs stay fixed inward full but their per units cost charges with changes inward output or sales. The per unit of measurement fixed cost growth with decrease inward output together with vice versa. Rent depreciation together with salary of permanent staff are the examples of fixed cost.
Features of fixed cost
i. The amount of fixed cost is never zero, fifty-fifty though the production is zero.
ii. The amount of fixed costs is constant upwards to a for sure range.
iii. Per unit of measurement fixed cost changes inward opposite direction of production activity.
iv. Fixed costs are either capacity costs or periodic costs or the committed costs.
v. Fixed cost cannot live on controlled inward a short-term period.
vi. Generally, fixed costs are unavoidable together with uncontrollable costs.
b. Variable cost: the costs that modify proportionately with the changes inward output are known every bit variable costs. An growth inward the book agency a proportionate growth inward the full variable costs together with decrease inward the book volition Pb to a proportionate spend upwards inward the full variable costs. There is a liner human relationship betwixt book together with variable costs. The per unit of measurement variable cost is ever constant.
Feature of variable cost
i. Per unit of measurement variable cost remains constant.
ii. When the production is zero, together with so the full amount of variable cost is also zero, but per unit of measurement variable cost volition never live on zero.
iii. Total amount of variable cost charges according to changes inward the degree of production.
iv. Variable cost is a controllable cost.
c. Semi-variable cost: the costs which are neither perfectly variable nor absolutely fixed inward relation to changes inward book are called semi-variable costs. Neither full amount nor per unit of measurement cost of semi-variable cost remains constant. If levels of production growth the full amount of semi-variable cost also growth together with per unit of measurement cost decrease but non proportionately. These costs have got the characteristics bone both fixed together with variable costs. Electricity telephone changes, H2O render charges are the examples of semi-variable costs. They are called mixed costs, combined costs or semi-fixed costs.
Feature of semi-variable cost
i. Neither full amount nor per unit of measurement cost remains constant.
ii. Semi-variable cost tin john never live on zero.
iii. When the degree of production growth the full amount of semi-variable cost also growth but per semi-variable cost decreases together with vice-versa.
On the ground of decision-making
For decision-making purpose, cost tin john live on classified every bit follows:
a. Relevant together with irrelevant cost: relevant costs are those costs which are afforested past times the activity together with determination of management. If direction changes the decision, these costs volition also change. On the other, the costs which are non affected past times the activity together with determination of the direction are irrelevant costs. Irrelevant costs are ignored inward decision-making. The examples of such costs are given inward the next table.
b. Avoidable together with unavoidable cost: avoidable costs are those costs that tin john live on reduced or avoided past times avoided a novel alternative whereas unavoidable costs cannot live on asterisked. Therefore, solely avoidable cost irrelevant for decision-making purposes. For example, if a eatery Terrie to accept out for sure item from the menu, the direct stuff together with other expenses tin john live on avoidable but the salary of the ready cannot live on reduced. Therefore, the cost of direct stuff is avoidable cost whereas, the salary is unavoidable cost.
c. Opportunity cost: the sacrifice of gain goodness due to the alternative of novel alternative is called an chance cost.
d. Marginal cost: marginal cost is the additional cost to gain extra units of output.
e. Differential cost: a divergence inward cost betwixt whatever 2 alternative is known every bit differential cost. It may live on incremental or decremented. Differential costs are relevant for decision-making. Incremental costs are growth inward cost due to modify inward determination whereas detrimental costs are reduction inward cost.
On the ground of controllability
An effective cost command requires noesis of cost controllability. Controllability may live on defines inward term of changes or alternatives of costs.
a. Controllable cost: the cost bailiwick to command or substantial influence of a exceptional vogue or private is called controlled costs. The cost that tin john live on changes or alternative past times the activity of a specific director is treated every bit controllable costs.
b. Uncontrollable cost: cost that is non bailiwick to influence past times the activity of director is called uncontrollable costs. These costs stay unchanged.
Segregation of cost
Meaning together with demand of segregation of cost
The physical care for of separating the semi variable costs into variable together with fixed cost is known every bit segregation of semi variable cost. The reasons for the segregation of the semi variable cost are mentioned below.
• Segregation helps to calculate the selling toll of the extra output. The cost does non growth with the extra output together with the selling toll is the full variable costs plus turn a profit if any.
• It also helps to command the variable cost. The semi variable cost should live on segregated to variable together with fixed element since the fixed cost cannot live on controlled.
• It aids the direction inward determination making. Since nearly of the managerial decisions are based on marginal costing, it is necessary to separate the semi variable costs into fixed together with variable parts.
Method of segregating cost
Costs tin john live on segregated inward 2 ways:
1. High-low indicate method (two indicate method)
2. Least-square method
High-low indicate method (two pint method)
To separate fixed together with variable costs, this method compares the highest together with lowest activity degree or book together with their costs. The variable cost charge per unit of measurement is obtained past times dividing the divergence inward costs past times the divergence inward the high together with depression degree of activity or volume. This method is also called 2 indicate methods since the segregation of mixed costs nether it is based on 2 points of unit of measurement together with costs. Here the units stand upwards for units of output, labour hours together with machine hours. The fixed cost is calculated past times subtracting the full variable cost from the full cost at whatever degree of activity.
a. First step: 2 unlike levels of output along with their full costs are selected. It improve to take away the higher together with lower range.
b. Second step: the divergence inward cost divided past times the divergence inward output to calculate the variable cost per unit.
Variable cost per unit of measurement (b) = high cost –low cost/ high output or unit of measurement – depression output or unit
c. Third step; after calculating the variable cost per unit, the next formula is used calculated the full fixed cost.
Fixed cost = full mixed cost – variable cost per unit of measurement x output units
d. Final step: after calculation the variable cost per unit of measurement together with full fixed cost, the cost at whatever degree of output tin john live on calculated using the next cost equation.
Total cost = full fixed cost + full variable cost
Least-square method
Least foursquare method is also known every bit unproblematic statistical analysis. It is a sophisticated technique of segregating fixed together with variable elements of a semi-variable cost. It established a mathematical human relationship betwixt costs together with book together with costs beingness theme upon volume. The to the lowest degree foursquare regulation determines a regression ebullition past times minimizing the amount of the vertical distances betwixt the actual values together with the predicted values. Under this method, the mixed cost are separated into variable together with fixed costs past times next the below mentioned process.
a. First step: a tabular array is prepared past times denoting the independent variables such every bit output unit, working hours, service current past times x together with the full mixed cost past times y.
b. Second step: the variable cost per unit of measurement is calculated using the next formula.
Variable cost per unit of measurement (B) = NEXY – EX. EY/ NEX2 – (EX) 2
c. Third step: after calculating variable cost per unit, the next formula is used to ascertain the fixed cost.
Fixed cost (a) = EY – bEX/ N
d. Final step: after calculating the variable cost per unit of measurement together with fixed cost, the next equation is used to calculate the full cost at whatever degree of output.
Least foursquare Equation of Total cost (Y) on Output (X):Y = a+bX
Selection of suitable method
As mentioned earlier, at that spot are 2 methods of segregating the mixed cost into variable together with fixed. They are high together with depression cost method together with to the lowest degree foursquare method. The one-time is unproblematic whereas the belatedly seems a chip to a greater extent than complex.
Thee segregation of a exceptional cost motional inward unlike levels of output should live on made using high together with depression cost method. However, if the variable cost per together with fixed cost tend to unlike inward unlike degree of output, the to the lowest degree foursquare method should live on used.
Estimation of cost
Cost estimation is the physical care for of pre-determining the costs of a for sure product, task or order. Such pre-determination may live on required for several purposes such every bit budgeting, measuring of performance efficiencies, training of fiscal statements (valuation of stocks) brand or purchase determination fixation of the selling toll of products etc. cost ascertainments is the physical care for of determining costs on the ground of actual data. Hence, computation of historical costs is cost ascertainment spell computation of time to come cost is cost
estimation. Cost estimation every bit good every bit cost ascertainment both are inter-related together with are of immersed usage to the management. In instance of a concern, that has a audio costing system, the ascertained costs volition greatly assist the managements inward the physical care for of estimation of rational accurate costs, which are so necessary for a diversity of purpose stated above.
When organizational involve inward volume production of products non the specific requirement of the customers together with sell their products from their sticks, together with so such organizations usage continuous operating costing. ICMA defines continuous performance costing every bit "the basic costing method applicable hewer goods or services outcome from a serial of continuous or representative operations or processes to which costs are charged before beingness averaged over the unit of measurement produced during the period.'
The of import characteristic of continuous performance costing is that, the physical care for involves inward production of identical units of output together with full costs are divided past times number of units produced to give the average cost per unit. The continuous performance costing is calcified into:
• Process costing
• Operation costing
• Output costing, and
• Service costing.
Process costing
If a production passes through unlike stages, each distinct together with good defined together with it desired to know te cost of production at each stage, them it is called physical care for costing. In other words, physical care for costing is employed nether which separate occupation organisation human relationship is opened for each process. The scheme of costing is suitable for the attractive industries, e.g., chemic manufacture, paints, foods, explosives, lather making etc.
Operation costing
Operation costing is a farther refinement of physical care for costing. The scheme is employed inward industries where volume or respective production is carried out or hewer articles or components have got to live on stocked inward semi-finished stage, to facilitate the execution of special orders, or for convenience of number or afterwards operations. The physical care for of costing inward broadly the same every bit for physical care for costing except that cost unit of measurement is an performance instead of a process. For example, the manufacturing of handles for bicycles involves a number of operations such every bit those of cutting steel sheets into proper strips, moldings, machining together with in conclusion polishing. The cost of each i of these operations may live on found out separately.
Output costing
In this method cost per unit of measurement of output or production is ascertained together with the amount of each chemical element constituting such cost is determined. Where the products tin john live on expressed inward identical quantitative units together with where industry is continuous, this type of costing is applied. Cost statements or cost sheets are prepared nether which the diverse items of expenses are classified together with thee full expenditure is divided past times full quanlitity produced inward gild to brand it at per unit of measurement cost of production. The method is suitable inward industries such every bit brick making, collieries, flourmills newspaper mills, together with cement manufacturing etc. it is called units or unmarried costing.
Service costing
The systems is employed where expense are incurred for provision of services such every bit those rendered past times carry companies, electricity companies, hospitals etc. the full expenses regarding performance are divided past times the units every bit may live on appropriate together with cost per unit of measurement or service is calculated.
Costing techniques
The costing techniques are categorized into adsorption costing, direct costing/marginal costing, touchstone costing together with Activity based costing.
Absorption costing
The do of changing all costs both variable together with fixed to operations, products or processes is termed every bit absorption costing. The institute of Cost together with works accountants of India defines absorption costing every bit "a method of costing past times which all direct costs together with applicable overheads are charged to products or cost centre for finding out the full cost of of production. Absorbed cost included production cost every bit good a administrative roughly other costs."
Marginal/ direct costing
The do of charging all direct costs to operation, physical care for or products, leaving all indirect costs to live on written off against turn a profit inward the current inward which they arise, is termed every bit direct costing.
It is a techniques of costing inward which allotment of expenditures to production is restricted to those expenses, which arise every bit a outcome of production i.e. direct material, direct labor, direct expenses together with variable overheads. Fixed overheads are excluded on the dry soil that inward instance where production various, the includision of fixed overhead may gives misleading results. This technique is useful inward manufacturing industrities with varying levels of output.
Standard costing
Standard costing is a scheme which the cost of the production is ascertained inward advance on the ground of for sure pre-determined standards. Taking the inward a higher house example, the cost of production tin john live on calculated inward advance if i is inward a seat to approximate inward advance the materials, labor, together with overhead costs that should live on incurred over the product. All this requires an efficient scheme of cost accounting. However, this scheme volition non live on useful if a vigorous scheme of controlling cost together with keeping it upwards to touchstone cost is non inward force. Standard costing inward becoming mere together with pop at nowadays days.
Activity based costing
It is a recent techniques bestially used for apportionment of overhead costs inward an organisation having products that differ inward book together with complexity of production. Under this technique, the overhead costs of the organisation are indentified with each activity, which is acting every bit the cost driver i.e. the crusade of incurrence of overheads cost. Such cost drivers may live on purchase orders lineament inspections, maintained request, stuff receipts, inventory movements, might consumed, machine hr etc. having identified the overhead costs with each cost center, cost per unit of measurement of cost driver tin john live on ascertained. The overhead costs tin john at nowadays live on assigned to jobs on the ground of the number of activities required for their completion.
Classification of costs
The way of groping the costs on the ground of roughly mutual characteristic together with nature is called classification of cost. There are unlike costs for unlike purposed together with no unmarried cost concept is relevant inward all situations. Therefore, costs tin john live on classified on the next bases:
• On the ground of chemical element of cost
• On the ground of functions
• On the ground of behavior
• On the ground of decision-making
• On the ground of controllability
On the ground of chemical element of cost
On the ground of element, cost tin john live on divided into material, labor together with expenses. They have got been mentioned inward details inward the following.
a. Materials: materials are needed to gain goods or provide services. Material tin john live on classified into exceptional inward the following.
• Direct material: means the materials which shape part of finished output together with tin john live on indentified with the finished production easily. For example; wood, plywood, adhesive, wood polish, nails etc. inward instance of manufacturing furniture, cost of cotton fiber inward instance of manufacturing cotton fiber yarn, cost of yarn inward instance of manufacturing cloth, cost of atomic number 26 inward instance of manufacturing mechanism etc. the principal time to come of direct materials is that these larn inward into together with shape part of the finished product.
• Indirect stuff cost: refers to the stuff costs, which cannot live on allocated but tin john live on apportioned to or absorbed past times cost centers or cost units. There are the materials, which cannot live on traced every bit part of the product, together with at that spot is distributed with the diverse cost centre or cost units on roughly equitable basis.
b. Labour: labour is needed to convert the raw materials into finished products. it is also needed to render the goods inward the manus of ultimate consumer. It tin john farther live on divided into 2 types every bit given below:
• Direct labour: is the workforce, which is direct involved on production. It refers to labour cost, which tin john live on identified with together with allocated to cost units. It includes 2 remuneration paid for converting the raw stuff into finished products or for altering the conduction, composition or status of the production manufactured past times an undertaking. For example, reward paid for spinning yarm is instance of spinning mills, reward paid for waving cloth inward instance of cloth mills, reward paid to a bricklayer for structure of a edifice past times a edifice contractor etc.
• Indirect labor cost: refers to the labour cost or wages, which cannot live on allocated but tin john live on apportioned to or absorption past times cost centers or cost units. For example, salary paid to manufacturing flora manager, salary paid to manufacturing flora supervisor or foremen, salary paid to full general director or sales director etc.
c. Other expenses: the expenses which are needed inward course of written report of production together with distribution except stuff together with labour autumn into this category. They tin john live on divided into types every bit mentioned below:
• Direct expenses: these costs are also called chargeable expenses. They are the expenses other than direct stuff together with direct labour cost, together with live on indentified with together with allocated to cost enters or cost units. Direct expenses are those which are incurred for each unit of measurement of industry specifically together with identifiable with them. For example, royalties paid on the ground of output, hire changes of special flora or machinery, wagon together with freight on direct stuff purchases, import duty together with octopi paid on the purchases of imported direct materials, amount payable to such-contractor etc.
• Indirect expenses: refer to the expenses, which cannot live on allocated but tin john live on apportioned to or absorbed past times cost centers or cost units. For example, rent rates taxes together with insurance of manufacturing flora building, manufacturing flora lighting, repairs to manufacturing flora edifice depreciation to flora together with machinery, repairs to machinery, depreciation together with insurance of business office building, depreciation together with insurance of showroom edifice etc. are known every bit indirect expenses.
Differences betwixt direct together with indirect cost
Direct costs are those which are direct involved inward the press of manufacturing goods or providing services together with larn the part of output whereas indirect costs gain non larn the part of output. Direct costs are the part of prime number costs together with indirect costs are the part of overhead. Such differences betwixt these costs are given below:
On the ground of functions
Based on the functions, the costs tin john live on classified into production cost, management cost, selling together with distribution cost, together with interrogation together with evolution cost.
a. Production cost: it included all direct materials, direct labour, direct expenses together with manufacturing expenses. It refers to costs concerned with manufacturing activity, which starts with render of stuff together with ends with primary packing of the product.
b. Administration cost: it is incurred for carrying the administrative business office of the organisation i.e., cost of policy formulation together with its implementation to attain the objective of the organization. T should non live on related to research, development, production, together with distribution or selling activiitity. It is also called business office cost.
c. Selling together with distributions cost: the selling cost refers to the cost of selling functions I.e., the cost of activities relating to create together with have demand for company's products together with to secure orders. The distribution costs are incurred to brand goods available to the customers. These costs incurred the cost of maintaining together with creating demand of product, making the goods available inward the hands of customer.
d. Research together with evolution costs: the interrogation cost is the cost of searching for novel products, novel manufacturing process, improvement of exiting products, processes or equipment together with the evolution cost is the cost of putting interrogation outcome on commercial basis.
On the ground of Behavior
On the ground of the demeanor inward relations to charges inward the book of activity, costs may live on classified as, fixed costs, variable costs together with semi-variable cost.
a. Fixed cost: the costs, whose full amount remains constant, upwards to an for sure capacity is called fixed cost. The degree of production changes, but full amount of fixed cost remains constant. Fixed cost is also called capacity cost, periodic cost, standing cost together with burden cost. If the degree of production growth together with so per unit of measurement cost decrease together with vice-versa, but full amount of fixed cost stay constant. These costs stay fixed inward full but their per units cost charges with changes inward output or sales. The per unit of measurement fixed cost growth with decrease inward output together with vice versa. Rent depreciation together with salary of permanent staff are the examples of fixed cost.
Features of fixed cost
i. The amount of fixed cost is never zero, fifty-fifty though the production is zero.
ii. The amount of fixed costs is constant upwards to a for sure range.
iii. Per unit of measurement fixed cost changes inward opposite direction of production activity.
iv. Fixed costs are either capacity costs or periodic costs or the committed costs.
v. Fixed cost cannot live on controlled inward a short-term period.
vi. Generally, fixed costs are unavoidable together with uncontrollable costs.
b. Variable cost: the costs that modify proportionately with the changes inward output are known every bit variable costs. An growth inward the book agency a proportionate growth inward the full variable costs together with decrease inward the book volition Pb to a proportionate spend upwards inward the full variable costs. There is a liner human relationship betwixt book together with variable costs. The per unit of measurement variable cost is ever constant.
Feature of variable cost
i. Per unit of measurement variable cost remains constant.
ii. When the production is zero, together with so the full amount of variable cost is also zero, but per unit of measurement variable cost volition never live on zero.
iii. Total amount of variable cost charges according to changes inward the degree of production.
iv. Variable cost is a controllable cost.
Differences betwixt variable together with fixed cost
c. Semi-variable cost: the costs which are neither perfectly variable nor absolutely fixed inward relation to changes inward book are called semi-variable costs. Neither full amount nor per unit of measurement cost of semi-variable cost remains constant. If levels of production growth the full amount of semi-variable cost also growth together with per unit of measurement cost decrease but non proportionately. These costs have got the characteristics bone both fixed together with variable costs. Electricity telephone changes, H2O render charges are the examples of semi-variable costs. They are called mixed costs, combined costs or semi-fixed costs.
Feature of semi-variable cost
i. Neither full amount nor per unit of measurement cost remains constant.
ii. Semi-variable cost tin john never live on zero.
iii. When the degree of production growth the full amount of semi-variable cost also growth but per semi-variable cost decreases together with vice-versa.
For decision-making purpose, cost tin john live on classified every bit follows:
a. Relevant together with irrelevant cost: relevant costs are those costs which are afforested past times the activity together with determination of management. If direction changes the decision, these costs volition also change. On the other, the costs which are non affected past times the activity together with determination of the direction are irrelevant costs. Irrelevant costs are ignored inward decision-making. The examples of such costs are given inward the next table.
c. Opportunity cost: the sacrifice of gain goodness due to the alternative of novel alternative is called an chance cost.
d. Marginal cost: marginal cost is the additional cost to gain extra units of output.
e. Differential cost: a divergence inward cost betwixt whatever 2 alternative is known every bit differential cost. It may live on incremental or decremented. Differential costs are relevant for decision-making. Incremental costs are growth inward cost due to modify inward determination whereas detrimental costs are reduction inward cost.
On the ground of controllability
An effective cost command requires noesis of cost controllability. Controllability may live on defines inward term of changes or alternatives of costs.
a. Controllable cost: the cost bailiwick to command or substantial influence of a exceptional vogue or private is called controlled costs. The cost that tin john live on changes or alternative past times the activity of a specific director is treated every bit controllable costs.
b. Uncontrollable cost: cost that is non bailiwick to influence past times the activity of director is called uncontrollable costs. These costs stay unchanged.
Segregation of cost
Meaning together with demand of segregation of cost
The physical care for of separating the semi variable costs into variable together with fixed cost is known every bit segregation of semi variable cost. The reasons for the segregation of the semi variable cost are mentioned below.
• Segregation helps to calculate the selling toll of the extra output. The cost does non growth with the extra output together with the selling toll is the full variable costs plus turn a profit if any.
• It also helps to command the variable cost. The semi variable cost should live on segregated to variable together with fixed element since the fixed cost cannot live on controlled.
• It aids the direction inward determination making. Since nearly of the managerial decisions are based on marginal costing, it is necessary to separate the semi variable costs into fixed together with variable parts.
Method of segregating cost
Costs tin john live on segregated inward 2 ways:
1. High-low indicate method (two indicate method)
2. Least-square method
High-low indicate method (two pint method)
To separate fixed together with variable costs, this method compares the highest together with lowest activity degree or book together with their costs. The variable cost charge per unit of measurement is obtained past times dividing the divergence inward costs past times the divergence inward the high together with depression degree of activity or volume. This method is also called 2 indicate methods since the segregation of mixed costs nether it is based on 2 points of unit of measurement together with costs. Here the units stand upwards for units of output, labour hours together with machine hours. The fixed cost is calculated past times subtracting the full variable cost from the full cost at whatever degree of activity.
a. First step: 2 unlike levels of output along with their full costs are selected. It improve to take away the higher together with lower range.
b. Second step: the divergence inward cost divided past times the divergence inward output to calculate the variable cost per unit.
Variable cost per unit of measurement (b) = high cost –low cost/ high output or unit of measurement – depression output or unit
c. Third step; after calculating the variable cost per unit, the next formula is used calculated the full fixed cost.
Fixed cost = full mixed cost – variable cost per unit of measurement x output units
d. Final step: after calculation the variable cost per unit of measurement together with full fixed cost, the cost at whatever degree of output tin john live on calculated using the next cost equation.
Total cost = full fixed cost + full variable cost
Least-square method
Least foursquare method is also known every bit unproblematic statistical analysis. It is a sophisticated technique of segregating fixed together with variable elements of a semi-variable cost. It established a mathematical human relationship betwixt costs together with book together with costs beingness theme upon volume. The to the lowest degree foursquare regulation determines a regression ebullition past times minimizing the amount of the vertical distances betwixt the actual values together with the predicted values. Under this method, the mixed cost are separated into variable together with fixed costs past times next the below mentioned process.
a. First step: a tabular array is prepared past times denoting the independent variables such every bit output unit, working hours, service current past times x together with the full mixed cost past times y.
Variable cost per unit of measurement (B) = NEXY – EX. EY/ NEX2 – (EX) 2
c. Third step: after calculating variable cost per unit, the next formula is used to ascertain the fixed cost.
Fixed cost (a) = EY – bEX/ N
d. Final step: after calculating the variable cost per unit of measurement together with fixed cost, the next equation is used to calculate the full cost at whatever degree of output.
Least foursquare Equation of Total cost (Y) on Output (X):Y = a+bX
Selection of suitable method
As mentioned earlier, at that spot are 2 methods of segregating the mixed cost into variable together with fixed. They are high together with depression cost method together with to the lowest degree foursquare method. The one-time is unproblematic whereas the belatedly seems a chip to a greater extent than complex.
Thee segregation of a exceptional cost motional inward unlike levels of output should live on made using high together with depression cost method. However, if the variable cost per together with fixed cost tend to unlike inward unlike degree of output, the to the lowest degree foursquare method should live on used.
Estimation of cost
Cost estimation is the physical care for of pre-determining the costs of a for sure product, task or order. Such pre-determination may live on required for several purposes such every bit budgeting, measuring of performance efficiencies, training of fiscal statements (valuation of stocks) brand or purchase determination fixation of the selling toll of products etc. cost ascertainments is the physical care for of determining costs on the ground of actual data. Hence, computation of historical costs is cost ascertainment spell computation of time to come cost is cost
estimation. Cost estimation every bit good every bit cost ascertainment both are inter-related together with are of immersed usage to the management. In instance of a concern, that has a audio costing system, the ascertained costs volition greatly assist the managements inward the physical care for of estimation of rational accurate costs, which are so necessary for a diversity of purpose stated above.
Year 2020 Online journal Subscription. Purchase and Subscribe all types of Indian journals like science, Engineering Journals, Specializing in print and electronic journal publishing at Geography and You
ReplyDelete