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Cost Accounting

Explore key cost accounting terminologies and concepts including cost units, cost centers, relevant costs, and more. Enhance your understanding of cost accumulation, standard costs, and implicit vs. explicit costs.

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Cost Accounting

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  1. Cost Accounting Terminologies Used In Cost & Management Accounting Lecture-2 BY AHSAN RIAZ SHEIKH

  2. 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

  3. Important terms • Cost unit • Cost center • Revenue center • Profit center • Opportunity cost • Investment center • Relevant cost • Irrelevant cost • Sunk cost • Product cost • Period cost

  4. Important terms • Historical cost • Standard cost • Implicit cost • Explicit cost • Differential cost • Cost accumulation

  5. Cost unit It is a cost of a product or services in relation to which the cost is determine, 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.

  6. 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 concern • Auto service department • Electrical service department • Packaging department • Janitorial service department

  7. 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 department • Factory outlet

  8. 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 branch • A division

  9. 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.

  10. 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 branch • A division

  11. Relevant Cost • Relevant cost is that changes with a change in decision. These are future costs that affect the current decision. • A relevant cost (also called avoidable cost or differential cost)[1] is a cost that differs between alternatives being considered. • Examples • Variable cost • Fixed cost which changes with in an alternatives • Opportunity cost

  12. Irrelevant Cost Irrelevant costs are the costs that would not effect the current decision. Two common types of irrelevant costs are sunk costs and future costs that do not differ between alternatives. • Examples: • Building Rent • Machine Depreciation

  13. Sunk Cost & future cost Sunk cost is the cost of resource already required that cannot be changed with the change in decision. Sunk costs are unavoidable because they have already been incurred. Future costs that do not change between alternatives are also essentially unavoidable with respect to the alternatives being considered. • Examples: • Research Cost • Architect consultation fee

  14. Product Cost Product cost is a cost that is incurred in producing goods and services. Example Direct material, direct labor and factory overhead

  15. 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

  16. 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.

  17. Standard Cost Standard cost is a Predetermine cost of the units. • An estimated or predetermined cost of performing an operation or producing a good or service, under normal conditions. • Standard costs are used as target costs (or basis for comparison with the actual costs), and are developed from historical dataanalysis or from time and motion studies. They almost always vary from actual costs, because every situation has its share of unpredictable factors. Also called normal cost. Example Budgeted cost = Rs 400 Budgeted hours = 10 hours Standard cost per hour is Rs. 40

  18. Implicit Cost Implicit cost is an opportunity cost. • Example • Uses its own capital • Uses its owner's time and/or financial resources

  19. Explicit cost The actual cost incurred is an explicit cost . • Example • Wage • Rent • Materials

  20. Differential Cost or Incremental cost It is the difference of the costs of two levels. • Example • Cost at producing 1,000 units is 15,000 • Cost at producing 3,000 units is 60,000 • Difference between differential cost and marginal cost

  21. Cost Accumulation • Cost accumulation are the various ways in which the information in a set of cost accounts may be aggregated to produce report. It is a method of cost accounting applied to production carried out by a series of chemical or operational stages or processes. Generally, it is the allocation of all time, material and expenses to an individual project or job

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