Presentation on cost

PRESENTATION ON COST

SUBMITTED BY:-

AASHISH CHANDEL

ROLL NO 75134005

CONTENTS

INTRODUCTION

TYPES

COST

• The amount of money needed to buy, do, or make something.

• In Business cost is monetary evaluation of

EFFORT MATERIAL RESOURCES

TIME AND

UTILITES

CONSUMED

RISK

INCURRED

DELIVERY OF

GOOD OR

SERVICE

TYPES

ACTUAL COST

INCRMENTAL COST

OPPORTUNITY COST SUNK COST

BOOK COSTEXPLICIT COST

ECONOMIC COSTOUT OF POCKET COST

INDIRECT COST

ACCOUNTING COST

DIRECT COST CONTROLLABLE COST

NON CONTOLLABLE

COST

ABANDONMENT COST

HISTORICAL COST

URGENT COST

VARIABLE COSTTOTAL/AVERAGE

COST

BUSINESS COST

SHUTDOWN COST

FIXED COST

SHORT RUN AND LONG RUN

COST

Actual Cost

• Actual cost is defined as the cost or expenditure which a firm incurs for producing or acquiring a good or service.

• Examples: Cost of raw materials, Wage Bill

Opportunity Cost

• It is the return from the second best use of the firms resources which the firms forgoes in order to avail of the return from the best use of the resources.

• Examples: If a firm owns a land, there is no cost of using the land (ie., the rent) in the firms account. But the firm has an opportunity cost of using the land, which is equal to the rent forgone by not letting the land out on rent.

Sunk Cost

• Sunk costs are those do not alter by varying the nature or level of business activity.

• Examples: All the past costs are considered as sunk costs. The best example is amortization of past expenses, like depreciation.

Incremental Cost

• Incremental costs are addition to costs resulting from a change in the nature of level of business activity.

• Example: Change in distribution channels adding or deleting a product in the product line

Explicit Cost

• Explicit costs are those expenses/expenditures that are actually paid by the firm.

• Explicit costs are important for calculating the profit and loss.

• Example: Interest payment on borrowed funds, rent payment, wages, utility expenses etc.

Implicit Cost

• Implicit costs are a part of opportunity cost. They are the theoretical costs ie., they are not recognised by the accounting system and are not recorded in the books of accounts but are very important in certain decisions.

• Examples: Rent on idle land, depreciation on dully depreciated property still in use, interest on equity capital etc.

Book Cost

• Book costs are those business costs which don't involve any cash payments but a provision is made in the books of accounts in order to include them in the profit and loss account and take tax advantages

Out Of Pocket Costs

• Out of pocket costs are those costs are expenses which are current payments to the outsiders of the firm.

• All the explicit costs fall into the category of out of pocket costs.

• Examples: Rent Payed, wages, salaries, interest etc

Accounting Costs

• Accounting costs are the actual or outlay costs that point out the amount of expenditure that has already been incurred on a particular process or on production.

• Examples: All Sunk costs are accounting costs

Economic Costs

• Economic costs are related to future. They play a vital role in business decisions as the costs considered in decision - making are usually future costs

Direct Cost

• Direct costs are those which have direct relationship with a unit of operation like manufacturing a product, organizing a process or an activity.

• Examples: In operating railway services, the costs of wagons, coaches and engines are direct costs.

Indirect Costs

• Indirect costs are those which cannot be easily and definitely identifiable in relation to a plant, a product, a process or a department.

• Indirect costs are both the fixed and the variable type.

• Example: The cost of factory building, the track of a railway system etc., are fixed indirect costs and the costs of machinery, labor etc.

Controllable Costs

• Controllable costs are those which can be controlled or regulated through observation by an executive and therefore they can be used for assessing the efficiency of the executive.

• Example: Inventory costs can be controlled at the shop level etc.

Non Controllable Costs

• The costs which cannot be subjected to administrative control and supervision are called non controllable costs.

• Example: Costs due obsolesce and depreciation, capital costs etc.

Historical Costs and Replacement Costs

• Historical cost or original costs of an asset refers to the original price paid by the management to purchase it in the past.

• Replacement costs refers to the cost that a firm incurs to replace or acquire the same asset now.

• Example: If a firm acquires a machine for $20,000 in the year 1990 and the same machine costs $40,000 now. The amount $20,000 is the historical cost and the amount $40,000 is the replacement cost.

Shutdown Costs

• The costs which a firm incurs when it temporarily stops its operations are called shutdown costs.

• These costs can be saved when the firm again start its operations. Shutdown costs include fixed costs, maintenance cost, layoff expenses etc.

Abandonment Costs

• Abandonment costs are those costs which are incurred for the complete removal of the fixed asset from use.

• These may occur due to obsolesce or due to improvisation of the firm. Abandonment costs thus involve problem of disposal of the asset

Urgent Costs

• Urgent costs are those costs which have to be incurred compulsorily by the management in order to continue its operations.

• If urgent costs are not incurred in time the operational efficiency of the firm falls.

• Example: Cost of material, labour, fuel etc

Business Cost and Full Cost

• Business costs include all the expenses incurred by the firm to carry out business activities.

• Costs Include all the payments and contractual obligations made by the firm together with the book cost of depreciation on plant and equipment.

• Full costs include business costs, opportunity costs, and normal profits.

Fixed Costs

• Fixed costs are the costs that do not vary with the changes in output. In other words, fixed costs are those which are fixed in volume though there are variations in the output level.

• Examples: Expenditures on depreciation costs of administrative, staff, rent, land and buildings, taxes etc.

Variable Costs

• Variable Costs are those that are directly dependent on the output i.e.., they vary with the variation in the volume/level of output.

• Example: Cost of raw materials, expenditure on labour, running cost or maintenance costs of fixed assets such as fuel, repairs, routine maintenance expenditure.

Total Cost, Average Cost and Marginal Cost

• Total cost (TC) refers to the money value of the total resources/inputs required for the production of goods and services by the firm.

• TC = VC + FC

• Average Cost (AC) , refers to the cost per unit of output assuming that production of each unit incurs the same cost.

• AC= TC/O

• Marginal costs(MC), refers to the additional costs that are incurred when there is an addition to the existing output level of goods and services

Short Run Cost

• These costs are which vary with the variation in the output with size of the firm as same.

• Short run costs are same as variable costs.

Long Run Cost

• These costs are which incurred on the fixed assets like land and building, plant and machinery etc.

• Long run costs are same as fixed costs. Usually, long run costs are associated with variations in size and kind of plant.