These include the expenditure incurred in production, from raw materials and labor to overhead costs. It is a very imperative determinant concerning the profitability and health of a business. Therefore, getting to know what cost entails will enable businesses to effectively manage their budget and cost. Examples of variable costs are direct material cost, direct wages, direct expenses, consumable stores, and commission on sales. Common examples of direct costs include the materials used and labor employed in manufacturing an article or in a production process.
Period Cost
It is equal to the benefits forgone by electing one decision alternative over another and can be a cost that implies no cash outlay. A product cost is a cost that is assigned to goods either purchased or manufactured for (re)sale. They are treated as current assets when incurred and posted to the statement of financial position as inventory until the final product is sold. The postponable cost is that cost which can be shifted to the future with little or no effect on the efficiency of current operations. These costs can be postponed at least for some time, e.g., maintenance relating to building and machinery. Examples of such costs are costs of sheltering the plant and equipment and construction of sheds for storing exposed property.
Classification of Cost: Importance & Key Examples Explained
In manufacturing, economic crises can also be averted by postponing certain costs. Sometimes, the normal operations of a business must be suspended temporarily due to unfavorable market conditions, strikes, or other forces. For example, interest on capital, though not actually payable, must often be included to judge the relative profitability of two products involving unequal outlays of cash.
Overhead Allocation
- Job costing accumulates the costs incurred in the production of a single unit or a single batch of units.
- Variable costing describes when only variable manufacturing costs are inventoried, and fixed manufacturing cost is treated as an expense at the time period in which it is incurred (that is, period costs).
- They are, therefore not incorporated into formal accounting systems because they do not incorporate cash receipts or outflows.
- Standard cost – predetermined cost based on some reasonable basis such as past experiences, budgeted amounts, industry standards, etc.
They relate to organizational activities such as selling and administration. Period costs are recognized in the income statement as an expense at the time they are incurred. Operating costs refer to the cost of undertakings which do not manufacture any product but which provide services. The abandonment cost is the cost incurred in closing down a department or a division or in withdrawing a product or ceasing to operate in a particular sales territory etc. The abandonment costs are the cost of retiring altogether a plant from service. Abandonment arises when there is a complete cessation of activities and creates a problem as to the disposal of assets.
Selling costs are incurred to create and stimulate demand and secure orders. As such, these costs are incurred in connection with the marketing of products. Costs can be classified using different bases or characteristics, including element, nature, variability, controllability, normality, and function. Another state unemployment insurance sui rates important distinction to make when looking at costs, particularly when making business plans and evaluating subsequent performance against those plans, is that between controllable and uncontrollable costs. Merchandising organizations purchase and then sell tangible products without altering their basic form.
The cost is said to be relevant if it helps the manager in taking a right decision in furtherance of the company’s objectives. It can also be defined as any cost which is affected by the decision at hand. The relevant cost must be a future cost, i.e., one which is expected to be incurred and not a historic or sunk cost which has already been incurred. Costs reported by conventional financial accounts are based on historical valuations. But during periods of changing price levels, historical costs may not be correct basis for projecting future costs.
For example, incremental cost increasing output from $1 000 to $1 100 units per week is the additional cost of producing an extra 100 units per week. Period costs (expenses) incurred in and due to administrative activities. Accountants and managers use many different concepts of cost, each usually for a different purpose.
The urgent costs are those which must be incurred in order to continue operations of the firm. For example, cost of material and labour must be incurred if production is to take place. These costs cannot be influenced by the action of a specified member of the organization.