Cost Production and Types of Cost

According to Rajasekaran and Lalitha (2010 ) the cost is an estimated amount given for an item or a global expense that the owner of the enterprise

Cost allocation is a very crucial procedure for many companies- not just production companies, but also in companies that provide service. Cost allocation has one purpose and that is to enable the determination of the cost of a product per unit in production companies and the cost of a provided service in service companies. Therefore, methods for cost allocation directly affect the service or product profitability assessment and at the same time sway segment and company profitability. The main problem is the choice of the cost allocation accounting approach. There are certain methods for cost allocation that do not apply the same to every company. If the method for

10.__________ is the part of the accounting system that measures costs for the purposes of management decision-making and financial reporting.

Fixed costs: Costs that do not vary with output or sales e.g. managers salaries, rent and rates on business premises.

Opportunity cost is a more comprehensive and important concept than accounting cost because it allows firms to calculate their implicit cost. This illustrates to firms the value of the lost alternative and also the opportunity cost of their output goods and services. For example, a new established vehicle manufacturing company produces 2 trucks monthly. Accounting cost determines the company is making a profit when calculating their total revenue minus explicit costs only. In addition, the company

In general, cost means the amount of expenditure (actual or notional) incurred on, or attributable to a given thing.

3. Fixed costs:- Fixed costs that do not vary depending on production or sales. They include salaries, rent, insurance, accounting costs

There are three perceptions of cost. Those three perceptions are as follows: commitments, expenses and cash flow. Commitment is simply agreeing to pay the vender a retain amount of money. This is typically a concern of the project manager. The commitment made by the project manger is taken out of the budget of the overall project. Unfortunately, many accounting systems are not structured to support project cost reporting needs and do not identify commitments. This plays havoc with the project manager’s fiscal control process, as he cannot get a

For any firm, it is very much critical and crucial for the accurate estimation of product costs in order for the operations to be profitable. It is very much essential for companies to know which products would actually generate profit for them which can only be found out by correct cost estimation. For such cost estimation companies adopt certain system basically known as a costing system or product system or a cost accounting system. Costing system (cost accounting system), can simply be understood as a system that can be adopted or used by a company or a firm for estimating the cost of their products (goods or services) so as to analyze profitability, valuation of

J. Maurice Clark (1923) outlined different types of overhead costs such as avoidable, sunk, incremental and relevant costs with which we are still familiar today. Clark illustrated “different costs for different purposes” and by using statistical data to estimate cost, it is more objective than that of judgemental arbitrary basis. However, he feared confounding factors that altered statistical relationship between cost and output but in present day we use multiple regressions to account for these factors. Clark separated cost accounting information from financial accounting for analysis on pricing strategy and operational efficiency. (Kaplan 1983)

When properly implemented, the cost accounting function can have a pervasive influence in the modern corporation. Unfortunately, it is not always properly implemented because management often is not completely aware of all the uses to which the cost accounting function can be put. This chapter describes the main categories of activities in which this function can become involved, and can be used as a guide by the controller in creating a well-rounded niche for the cost accountant.

Period Costs. Period costs are expensed in the time period in which they are incurred. All selling and administrative costs are typically considered to be period costs. You should be careful to point out that the usual rules of accrual accounting apply. For example, administrative salary costs are “incurred” when they are earned and not necessarily when they are paid to employees.

When budgeting for the future as well as estimating costs for production of goods in the present there is a need to assess the prices of the direct inputs. The direct costs are those which are directly incurred as a result of production and can be completely attributed to that production. These costs will include materials, labor and other expenses such as power. The process of costing may appear simple; to calculate the direct costs and then allocate the indirect costs. However, while the concept may appear simple, the practice can be difficult with a number of potential sources of error which may lead to wrong assessments.

- Expenses (overheads, outgoings) are costs incurred for the purposes of earning income. They include items such

Although the traditional product costing systems are a requirement imposed by GAAP, investors, financial reporting, and other accounting rules and regulations, it has some disadvantages and no longer provides better decision making or a strong link between strategy and operations for managers. The system fails to allocate nonmanufacturing cost like administrative expenses. During the time traditional costing methods were created, direct labour was the biggest cost of production, but today, the system is outdated (Johnson, R. 2014). Manufacturing companies today now use machines and computers for their productions; this has led to a decreased use of labour in manufacturing processes and the development of other costing systems such as activity-based costing (Pondent, 2014). Unlike traditional, ABC costing systems assign resource costs to