CONCEPTS OF COST

Cost is the amount of resource given up in exchange for some goods or services. The resources given up
are money or money’s equivalent expressed in monetary units.
The Chartered Institute of Management Accountants, London defines cost as “the amount of
expenditure (actual or notional) incurred on, or attributable to a specified thing or activity”.
This activity of a firm may be the manufacture of a product or the rendering of a service which involves
expenditure under various heads, e.g., materials, labour, other expenses, etc. A manufacturing organisation
is interested in ascertaining the cost per unit of the product manufactured while an organisation rendering
service, e.g., transport undertaking, canteen, electricity company, municipality, etc., is interested in
ascertaining the costs of the service it renders. In its simplest form, the cost per unit is arrived at dividing
the total expenditure incurred the total units produced or the quantum of service rendered. But this
method is applicable if the manufacturer produces only one product. If the manufacturer produces more than
one product, it becomes imperative to split up the total expenditure between the various products so that the
cost of each product can be ascertained separately. Even if only one product is manufactured, it may be
necessary to analyse the cost per unit of each item of expenditure that goes to make up the total cost. The
problem becomes more complicated where a multiplicity of products is produced and it is necessary to
analyse the cost per unit of each product into various items of expenditures that make up the total cost.




For a consumer cost means price. For management cost means ‘expenditure incurred’ for producing a
particular product or rendering a particular service. The process of ascertaining the cost is known as
costing. It consists of principles and rules governing the procedure of finding out the costs of goods/
services. It aims at ascertaining the total cost and also per unit cost. For instance, in transport companies the
total cost for the period is ascertained and used to find out the cost per passenger/mile. i.e. the cost of
carrying one passenger for one mile. It provides for analysis of expenditure in such a way that the
management gets complete idea about even the smallest item of cost.
It is necessary to specify the exact meaning of “cost”. When the term is used specifically, it is modified with
such terms as prime cost, fixed cost, sunk cost, etc. Each description implies a certain characteristic which is
helpful in analysing the cost. It helps cost accounting in achieving its three basic objectives namely-cost
ascertainment, cost control and cost presentation.
A cost must always be studied in relation to its purpose and conditions. Different costs may be ascertained
for different purposes and under different conditions. Work-in-progress is valued at factory cost, while stock
of finished goods may be valued at cost of production. Even if the purpose of the study of cost is the same,
different conditions may lead to variation in cost. The cost per unit of a product is sure to vary with an
increase in the volume of output since the amount of fixed expenses to be borne each unit of output
decreases.
It is also important to note here that there is no such thing as an exact cost or true cost because no figure of
cost is true in all circumstances and for all purposes. Most of the costing information is based on estimates;
for example, the amount of overheads is generally estimated in advance; it is distributed over cost units,
again on an estimated basis using different methods. Many items of cost of production are handled in an
optional manner which may give different costs for the same product without going against the accepted
principles in any way. Depreciation is one such item, the amount of which will vary in accordance with the
method of depreciation being used. Thus, to arrive at an absolutely correct cost may be quite difficult unless
one waits for a long time which time the costing information may lose all its value.

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