Different Type of Costs.

8/8/2019 Different Type of Costs.

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ManagementAccounting:

A Road of Discovery

Presentations by:

Syed Tauseef Raza (SNHU &ITM)


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Needs Determine the Form of

Accounting Data

Managers need changing information to meetchanging needs!

Types of Accounting Systems

Financial Accounting Rules and procedures

Accounting information systems and internal controls

Auditing

Cost Accounting Product costing

Activity-based costing


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What is Management

Accounting?

Accounting for Planning,

Control, and Evaluation


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Whats COST ?

Cost means the amount of

expenditure incurred.


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Problems in Identifying and

Measuring BenefitsHow do I measure

the benefit of

employee training?

How do I measure

the benefit of

employee training?

What is the

monetary benefit of

a happy customer?What is the

monetary

benefit of animproved

working

environment

?

What is the

monetary

benefit of animproved

working

environment

?

How do I

measure the

benefit of

improved

quality?


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Problems in Identifying and

Measuring Costs

What is the cost of

a dissatisfied

customer?

How do I

measure thecost of setting

my price too

high?

How do I measure

the cost of poor

quality?

What is the cost

of postponingthis years

training

program?


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Cost Classification and Cost

Behavior

SMBA 01

Fall 2010SNHU & ITM


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Cost Classifications for Predicting

Cost Behavior

By reaction to changes in the level ofactivity within the relevant range.

Total variable costs change when activitychanges.

Total fixed costs remain unchanged when

activity changes.


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Variable Cost

Raw materials

Direct labor

Power and fuel

Packing material

Product consumables.


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Fixed Cost

Factory /Office/Go down Rent

Staff/Management Salaries

Depreciation

Annual maintenance contracts

Legal fees

Director fees

Auditors fees Property tax

Printing and stationary costs

Interest on loans


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ON THE BASIS OF MANAGERIALDECISIONMAKING

MARGINAL COSTS

SUNK COSTS

IMPUTED COSTS

OPPORTUNITY COSTS

AVOIDABLE COSTS

UNA

VOIDABL

ECOSTS

DIFFERENTIAL COSTS


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The marginal cost of an additional unit of output is the cost of the additionalinputs needed to produce that output.

Marginal cost and average cost can differ greatly. For example, suppose itcosts $1000 to produce 100 units and $1020 to produce 101 units. Theaverage cost per unit is $10, but the marginal cost of the 101st unit is $20

Marginal Cost (MC)


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Imputed costs a.k.a implicit costs.

Implicit Cost + Explicit Cost = Total Cost.

E.g.

Tauseef builds a cabinet. He spends 2 hours building the cabinet. He couldhave been working instead and normally makes $25/hour at his job. Since hewas building a cabinet he wasn't paid for this time. The materials to makethe cabinet cost him $20.

His Explicit Costs are: $20 in materials

His Implicit Costs are: $25/hr x 2 hrs= $50 of foregone pay

IMPUTED COSTS (IC)


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Definition of Avoidable Cost: A cost that can be avoided by not producing aparticular good. For example, if you are building cars, an avoidable costs

would be the raw materials.

If you stopped producing a car, you would no longer have to pay for the rawmaterials such as steel and aluminium. However, other costs of a firm maybeunavoidable, at least in the short term. For example, the firm still has thefixed costs such as rent and paying some safety workers.

For this reason avoidable costs are often variable costs.

Avoidable and unavoidable costs


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Differential cost is only calculated for decision making.

For example:

If the work is done in machine the cost is Rs. 2,55,000/- if the work is donewith the labor the cost will be Rs. 2,00,000/- the differential cost is Rs.55,000.

Differential Costs


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Opportunity Costs

The potential benefit that is given up when onealternative is selected over another.

Example: If you were not attending this

program, you could save $10,000 per year.Your opportunity cost?


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Sunk Costs

Sunk costs have already been incurred and cannotbe changed now or in the future. They should

be ignored when making decisions.

E

xample: You bought an automobile that cost$10,000 two years ago. The $10,000 cost issunk because whether you drive it, park it, tradeit, or sell it, you cannot change the $10,000 cost.


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COSTSHEETDIRECT MATERIALDIRECT LABOUR

DIRECT EXPENSES

PRIME COSTFACTORY OVERHEADS

FACTORY COSTOFFICE OVERHEADS

COST OF PRODUCTIONSELL & DIST OVERHEADS

COST OF SALESPROFIT

SALES


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Summary of the Types of Cost

Classifications

Financial reporting

Predicting cost behavior Products- determining unit costs

Decision making


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The Goal of Good Management is

to CreateV

alue

Cost Management is applying the valuecriteria to every decision we make, every

activity we perform, and every process wecomplete.

Management accounting systems are used toenhance both decision making and

management control. Management accounting systems do not

need to be perfect, only good enough toincrease value.


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Any Query ?

Thank You

Different Type of Costs.

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