1.1.2 Cost Concepts
Cost is the amount of resources spent given up in exchange for something and is expressed in monetary terms. In general ‘cost’ means “the amount of expenditure incurred or attributable to a given thing”. The expenditure incurred may be actual or notional.
Cost is defined differently by economists, cost accountants and others. Some of the definitions of cost are given below:
• Cost is “The amount of expenditure (actual or notional) incurred or attributable to a given thing” - CIMA, UK
• “Cost is a measurement, in monetary terms of the amount of resources used for the purpose of production of goods or rendering services” - Cost Accounting Standards of ICWA of India
• “A cost is the value of economic resources used as a result
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In this type of cost centre, cost is analysed and related to series of operation in a sequence. For example, In chemical industries: Steel rolling, Refineries, etc.,
• Operation cost centre: The machines or persons which carry out similar operations are represented by operation cost centre. This will ascertain the cost of each operation inside the factory irrespective of its location.
Cost Unit:
A cost unit can be defined as a unit of measurement to ascertain the cost of products and services. Cost units are selected to express cost per unit. They are measured based on the nature of products and business. There are generally two types of cost units, which are explained as follows:
1. Unit of production: It is mainly applied in manufacturing industries. For example, a tonne of aluminium or a gram of silver, etc.
2. Unit of service: It is applied in service industries. For example, per table, per day, etc.
Some of the examples of how cost unit is used for different products and services are listed below. We measure them as:
Bricks Per 1000 bricks made
Collieries Per ton of coal raised
Printing Per 1000 impressions
Ship-building Per
Overhead based on units sold includes only sales and marketing. Sales and marketing will be targeted mostly towards the products that are already on the market, and so units sold is the best way to associate the cost with each product. (Figure A)
Operations Management Process is the central arteries within the organization because it produces the planning process for goods and services, which are its reason for existent. Operations management is linked to all organizations as every organization is producing either a product or a service. However, it cannot be said to be the most important function since there are other functional areas and boundaries within an organization. In today's fast changing world, organizations have to have a tendency towards being efficient, effective and innovative to the changing environment to succeed. Operations Management has to use metrics in order for them to accomplish their task and be successful with minimal interruptions within the organization.
Cost-plus pricing, it the industry pricing standard, and is a method to determine a price of the product by finding the cost per unit and then including a mark-up
Cost accounting system has two types, job order costing, and process cost system. These two cost systems are very different, almost every company uses order costing or process costing. Starbucks, is a coffee shop where citizens congregate to drink there morning coffee, study, and or socialize. Starbucks is one of the oldest and largest privately held specialty coffee retailer in the United States. (Starbucks) Their passion is to discover the flavors you love and always bring it home, delivering the look, taste and aroma of the world’s best coffee and teas. Job order costing is a very easy way in order to help Starbucks managers to know how much profit their company (Starbucks) made.
These costs are not straightforwardly associated to a project. Examples include organization costs such as advertising or accounting. G&A costs are generally billed as a percent of total costs, or items such as labor, materials, or equipment. Using the sums of direct and overhead costs for work packages, it is possible to cumulate the costs for any deliverable for the entire project (Gray & Larson, 2005).
[4] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 3, Cost Assignment, p. 54-59
Without a financial cost accounting system in place, the HCO puts itself at great risk for errors and miscommunication. A cost accounting system is a system for recording, analyzing, and allocating cost to the individual services provided to patients” (Imus 1). Likewise, a cost accounting system is comprised of many different aspects that establish a stable financial budget model and forecast.
Process costing System is an accounting expression which describes one method to determine the manufacturing costs to the units manufactured . Processing is typically used when similar units are mass produced. Also process costing system is a type of accounting process costing which is used to determine the cost of a produced inventory. Chartered Institute of Management Accountants (CIMA) defines process costing as " The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are average over the units produced during the period, being initially charged to the operation or process "( College Accounting Coach, 2007). Process costing is more important and appropriate for all businesses producing identical products during which production is an ongoing flow. Toyota is on the of the major companies in the world that used well-known new philosophic management to produce identical products using process costing system.
Process costing is a way of breaking down cost that goes into each product manufactured. This allows for the correct pricing of the product as well as looking at possible inefficiencies in the production process. The following reasons explain the importance of correctly allocating cost to each product.
Cost allocation is the process of identifying, aggregating, and assigning of cost to various separate activities. There is no overly precise method of charging cost to objects, hence resulting to approximate methods being used to do so. Amongst the approximation basis used includes square footage, headcount, cost of assets employed, and electricity usage amongst others. The main aim of cost allocation is to spread cost in the fairest possible method and also to impact the behavior pattern of the cost.
Primary production of homogenous goods and several processes are undertaken for the finished product to be realized is what is called process costing. All stages of processing and costs accrued during manufacturing of a product will be added to the final batch of products. Keenness is
For example: with the increase of the number of products produced, the cost of operating a machine also increase. Second we have batch level costs which is associated with batches; producing a multiple units of the same product that are processed together is called a batch. The third type is product level costs which arise from any activity in order to support the production of products. The fourth and the last type is facility level costs, this costs cannot be determined with a particular unit, product or batch; this costs are fixed with respect to batches, products and number of units produced. A single measure of volume is used for allocating costs to each service or product in traditional method for example: direct material cost, machine hours, direct labor cost and direct labor hours. A cost driver is an activity that generate costs, it can be generated by two types of costs the first is a particular machine 's running costs where the costs is driven by production volume as machine hours; the second is quality inspection costs where the cost is driven by the number of times the relevant activity occurs as the number of
The overall purpose of cost accounting is to advise top administration and the management team on the most suitable and cost effective methods and actions to employ based on cost, capability and efficiencies of a given product or service. It can be defined as the method where all the expenditures used during execution of business activities are gathered, categorized, examined and noted down (Horngren & Srikant, 2000). Once these numbers are gathered and recorded the information is used to determine a selling price and/or to identify possible investment opportunities. Although the principal aim or function of cost accounting is to help the business administration with their decision making and business planning process, the cost accounting data
Therefore, job order costing system is a widely used costing system in manufacturing as well as service operations. Moreover, when companies employ and accept orders or jobs for varying products, the assignment of cost to products becomes a strenuous task. Job order costing systems can be utilized in many aspects and entities in production of product offerings. An example of a situation in which you would use job order cost information is in an industry such as the building construction industry since each building is unique. Job-order costing systems need an average overhead rated based on a common measure of production, which includes labor hours, machine hours, or square footage (Edmonds, Tsay, & Olds, 2011).
form of matter alongwith an idea and a purpose. Most often, the actual cost of