A cost is defined as the amount of expenditure incurred on or attributable to a given thing or to ascertain the cost of a given thing. American Accounting Association has defined cost as “the foregoing, in monetary terms, incurred or potentially to be incurred in the realization of the objective of management which may be manufacturing of a product or rendering of a service”.
There are three elements of cost: Material, Labour and Services for a manufacturing organization.
Types of Cost
a. By time when computed
i. Historical Cost: Historical costs have already been incurred and cannot be affected by a decision. They are irrelevant in decision making purposes. Such costs are available only when the production of a particular thing has already been made.
ii. Standard (Planned) Cost: Standard costs are important for budgeting purposes. These costs are estimated cost i.e. computed in advance for different phases of business operation.
(Historic costs are used for comparison with budgeted performance in order to highlight areas where control action may be necessary.)
b. By Financing Costing
i. Revenue Cost: Revenue cost are incurred when running the business and charged to the profit and loss account.
ii. Capital Cost: Capital costs are incurred in acquiring long - term assets, which are not purchased for resale purposes. This expenditure is shown in the balance sheet.
c. By Responsibility
i. Controllable Cost: Costs which can be influenced by the action or within the control of management is controllable costs. All costs are controllable in the long run. Some fixed costs such as advertising, accounting, legal and research & development can be controlled in the short run.
ii. Uncontrollable Cost: Costs which cannot be influenced by the action or are not within the control of management is uncontrollable costs. Most of the fixed costs are uncontrollable i.e. that cannot be...