Cost concepts
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Transcript of Cost concepts
COST CONCEPTS
BYEP JOHN
11397044
• SELECTION BETWEEN ALTERNATIVES• DEPENDS ON BUSINESS DECISIONS• IMPORTANAT TO USE RIGHT ANALYSIS OF
COST• THE COST ESTIMATES BY CONVENTIONAL
FINANCIAL ACCOUNTING ARE NOT APPROPRITE FOR ALL MANAGERIAL USES.
• DIFFERENT BUSINESS PROBLEMS CALL FOR DIFFERENT KINDS OF COSTS.
COST CONCEPTS
FUTURE AND PAST COSTSINCREMENTAL AND SUNK COSTSOUT-OF-POCKET AND BOOK COSTS (ac)HISTORICAL AND REPLACEMENT COSTSEXPLICIT AND IMPLICIT COSTS(ac)ACTUAL AND OPPURTUNITY COSTS (ac)DIRECT AND INDIRECT COSTSSHUT DOWN AND ABANDONMENT COSTSPRIVATE AND SOCIAL COSTS
TYPES OF COSTS
FUTURE AND PAST COSTS
FUTURE COSTS ARE THE ESTIMATES OF TIME ADJUSTED PAST OR
PRESENT COSTS AND ARE REASONABLY EXPEECTED TO BE INCURRED IN SOME FURTURE
PERIOD OR PERIODS.
FUTURE AND PAST COSTS
PAST COSTS ARE ACTUAL COSTS INCURRED IN THE PAST AND THEY ARE ALWAYS CONTAINED IN THE
INCOME STATEMENTS.RECORD KEEPING ACTIVITY.
INCREMENTAL AND SUNK COSTS
INCREMENTAL COSTS ARE DEFINED AS THE CHANGE IN OVERALL COSTS
THAT RESULT FROM PARTICULAR DECISIONS BEING MADE
INCREMENTAL AND SUNK COSTS
SUNK COST IS THE ONE NOT AFFECTED OR ALTERED BY A
CHANGE IN THE LEVEL OR NATURE OF BUSINESS ACTIVITY.
OUT-OF-POCKET AND BOOK COSTS
OUT-OF-POCKET COSTS INVOLVE IMMEDIATE PAYMENTS TO
OUTSIDERS.WAGES AND SALARIES
OUT-OF-POCKET AND BOOK COSTS
IF OUT-OF-POCKET COSTS NOT PAID IT BECOMES BOOK COST. THIS CAN
BE CONVERTED INTO OUT-OF-POCKET COST BY SELLING ASSETS AND LEASING THEM BACK FROM
THE BUYER.
HISTORICAL AND REPLACEMENT COSTS
HISTORICAL COST STATES THE COST OF PLANT, EQUIPMENT AND
MATERIALS AT THE PRICE ORIGINALLY PAID FOR THEM.
REPLACEMENT COST MEANS THE PRICE THAT WOULD HAVE TO BE
PAID CURRENTLY FOR ACQUIRING THE SAME PLANT.
HISTORICAL AND REPLACEMENT COSTS
EXPLICIT AND IMPLICIT COSTS
EXPLICIT COSTS ARE THOSE EXPENSES THAT ARE ACTUALLY PAID BY THE FIRM
(PAID-OUT-COSTS). THEY ARE GENERALLY RECORDED IN BOOKS OF
ACCOUNT.
EXPLICIT AND IMPLICIT COSTS
IMPLICIT COSTS ARE THEOROTICAL EXPENSES IN THE SENSE THAT THEY GO UNRECOGNISED BY THE ACCOUNTING
SYSTEM. MAY BE DEFINED AS THE EARNINGS OF THOSE EMPLOYED
RESOURCES THAT BELONG TO THE OWNER HIMSELF
ACTUAL AND OPPURTUNITY COSTSTHE ACTUAL EXPENDITURE INCURRED FOR
ACQUIRING OR PRODUCING A GOOD OR SERVICE. THESE COSTS ARE GENERALLY
RECORED IN THE BOOK OF ACCOUNTS.
ACTUAL AND OPPURTUNITY COSTSTHE OPPURTUNITY OR ALTERNATIVE COST
ARE THE RETURNS FROM SECOND BESTUSE OF THE FIRM’S RESOURCES WHICH THE
FRIM FORGOES IN ORDER TO AVAIL ITSELFOF THE RETURNS FROM THE BEST USE OF THE
RESOURCES.
DIRECT AND INDIRECT COSTS
COST THAT CAN BE DIRECTLY ATTRIBUTEDTO THE PRODUCTION OF A UNIT
OF A GIVEN PRODUCT. THIS CAN BE EASILY
SEPARATED, ASCERTAINED AND IMPUTED TO A UNIT OF OUTPUT.
DIRECT AND INDIRECT COSTS
COSTS THAT CANNOT BE SEPARATEDAND CLEARLY ATTRIBUTED TO
INDIVIDUALUNITS OF PRODUCTION
LIKE ELECTRICITY CHARGES
SHUT DOWN AND ABANDONMENT COSTSSHUT-DOWN COSTS ARE REQUIRED TO BE INCURRED WHEN THE PRODUCTION
OPERATIONS ARE SUSPENDED AND WILL NOTBE NECESSARY, IF THE PRODUCTION
OPERATIONS CONTINUE.IF THE PRODUCTION IS SUSPENEDED,
THE PLANT, MACHINERY OR EQUIPMENTWILL HAVE TO BE PROTECTED BY PUTTING UP
SHEDS, USING TARPAULIN, PLASTIC SHEETS ETC.
SHUT DOWN AND ABANDONMENT COSTS
WHEN ANY PLANT IS TO BE
PERMANENTLY CLOSED DOWN,
SOME COSTS ARE TO BE INCURRED
FOR DISPOSING OFF THE FIXED ASSETS
PRIVATE AND SOCIAL COSTS
THE MICRO LEVEL ECONOMIC COSTS. IF THE DECISION OF A FIRM TO EXPAND
ITS OUTPUT LEADS TO INCREASE IN ITS COST, IT IS PRIVATE COST
ARE THOSE WHICH ARE ACTUALLY INCURRED OR PROVIDED FOR
BY AN INDIVIDUAL OR FIRM FOR ITS BUSINESS ACTIVITY.
PRIVATE AND SOCIAL COSTS
THE MACRO LEVEL ECONOMIC COSTS. IF IT LEADS TO CERTAIN COSTS TO THE SOCIETY,
MAY BE IN THE NATURE OF GREATER POLLUTION, CONGESTION ETCSOCIAL COST IS THE TOTAL COST TO THE
SOCIETY ONACCOUNT OF PRODUCTION OF A GOOD.
THANK- U