final lecture 2

7/29/2019 Final Lecture 2

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Cost Accounting

Terminoligies Used In Cost & Management Accounting

Lecture-2Himanshu Shah


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Review Of Last Lecture

In last lecture we discussed

Branches of accounting

Cost Classification Direct material Direct Labor Other direct production cost Factory overhead

Cost Behaviour Fixed cost Variable cost Semi variable cost


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Direct Materials

Example: A radio installed in an automobile


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Direct Labor

Example: Wages paid to automobile assembly workers


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Cost Classifications forPredicting Cost Behavior

How a cost will reactto changes in the level

of business activity.

Total variable costschange when activitychanges.

Total fixed costsremain unchangedwhen activity changes.


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Total Variable CostThe total variable cost increases withincrease in units..

Minutes Talked

TotalL

ongDistance

Tele

phoneBill


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Variable Cost Per Unit

Minutes Talked

PerMinute

Telephone

Charge

The cost per unit is constant.

For example, 10 paisa per minute.


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Total Fixed CostThe total fixed cost remains constantirrespective of numbers of units produced...

Number of Local Calls

Mon

thlyBasic

Tele

phoneBill


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Fixed Cost Per Unit

Number of Local Calls

MonthlyBasicTelepho

ne

BillperLocalCall

The average cost per local call decreases asmore local calls are made.


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Important terms

Cost unit Cost center Revenue center

Profit center Investment center Opportunity cost Relevant cost Irrelevant cost

Sunk cost Product cost


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Cost unit

It is a cost of a product or services in relation to which the cost isascertained, in simple words the cost of producing the units.

Example

Ball point for a Ball point manufacturing concern.Bottle for Beverage producing concern.Fan for a Fan manufacturing concern.


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Cost centre

Cost centre is a production or service location where costs

are incurred and may be attributed to cost units.

Examples

Workshop in a manufacturing concernAuto service departmentElectrical service departmentPackaging departmentJanitorial service department


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Revenue Center

It is part of the entity that earns sales revenue. Its manager

is responsible for the revenue earned not for the cost of

operations.

Examples:

Sales departmentFactory outlet


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Profit Center

Profit centre is a section of an organization where the

manager responsible for producing profit by utilizing

resources assigned by the organization

Examples:

A branchA division


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Investment Center

An investment centre is a segment which is a profit centre

where the manager has a responsibility for making capital

investment decision.

Examples:

A branchA division


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Opportunity Cost

Opportunity cost is the value of a benefit sacrificed in favor

of alternate decision.

Example

Building already let out at a rent of Rs. 10,000

that can be utilized at the palace of business.Rs 10,000 is opportunity cost for the business.


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Relevant Cost

Relevant cost is that changes with a change in decision.

These are future costs that affect the current decision.

Examples

Variable cost

Fixed cost which changes with in an alternativesOpportunity cost


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Irrelevant Cost

Irrelevant costs are the costs that would not effect the

current decision.

Examples:

Building Rent

Machine Depreciation


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Sunk Cost

Sunk cost is the cost of resource already required thatcannot be changed with the change in decision.

Examples:

Research Cost

Architect consultation fee


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Product Cost

Product cost is a cost that is incurred in producing goods

and services.

Example

Direct material, direct labor and factory overhead


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Period Cost

The cost are not related to production and are matched

against on a time period basis are period cost

Example

Selling and administrative expenses


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Historical cost

Historical cost is an actual cost that is borne at the date

of transaction .

Example

A building was purchased for Rs 400,000,it is historical cost of building.


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Standard Cost

Standard cost is a Predetermine cost of the units.

Example

Budgeted cost = Rs 400Budgeted hours = 10 hoursStandard cost per hour is Rs. 40


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Implicit Cost

Implicit cost is an opportunity cost.

Example

Uses its own capitalUses its owner's timeand/or financial resources


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Explicit cost

The actual cost incurred is an explicit cost .

Example

WageRent

Materials

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