COST CONCEPTS

BYEP JOHN

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• 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