Question

1-Define cost Accounting and enlist 10 example of product cost with explanation?

2-Define period cost and enlist 10 examples with explanation?

3-Define variable cost, fixed cost and mixed cost and enlist 10 examples of each category with explanation?

4-Define Sunk cost and opportunity cost and enlist 10 examples of each cost with explanation?

5- develop one numerical question from yourself and then find variable cost, fixed cost and total cost by using equation (Y=a + bx) with high low method (each student question must be different otherwise it will not be considered?

Answer 1

Cost Accounting is a method of accounting wherein all the costs involved in performing any process, project or product are noted and analyzed. Such analysis helps the management in taking strategic decisions.Cost accounting uses various techniques to make an organization cost effective.

Cost accounting is involved with the following:

• Determining the costs of products, processes, projects, etc. in order to report the correct amounts on a company's financial statements, and
• Assisting management in the planning and control of the organization
• Preparing special analyses that assists in making the best decisions

Product Costs- The costs involved in creating a product are called Product Costs. These costs include materials, labor, production supplies and factory overhead. The cost of the labor required to deliver a service to a customer is also considered a product cost. Product costs related to services should include things like compensation, payroll taxes and employee benefits.

Examples of Product Cost

• Raw material cost
• Wages and salaries
• Cartage inwards cost
• oil and grease costs
• Electricity
• Rent
• fuel cost
• Factory rent
• insurance costs
• factory and equipment depreciation

B)  Period costs are expenses that are easier to attribute to times and accounting periods than actual production processes or finished goods.These costs are apportioned as expenses against the revenue for the given tenure in which they are incurred. Period costs are also termed as a Period expense, time cost, capacity costs, etc.These cost not associated with production and should not form part of inventory valuation. Generally, unavoidable costs are considered as period expenses.

Examples of period costs

• General administation cost
• sales clerk Salary
• depreciation of office facilities
• advertising cost
• rent (not directly tied to a production facility
• Sales commision
• General office salaries
• Marketing expense
• Interest expense
• insurance premiums that a company pays for nonmanufacturing protection
• Selling expenses

c) Variable costs are expenses that vary in proportion to the volume of goods or services that a business produces. In other words, they are costs that vary depending on the volume of activity. The costs increase as the volume of activities increases and decrease as the volume of activities decreases.

Examples of Variable costs

• Direct materials- These are the costs which are related to raw material required for making the product. Eg cost of wood required for making chair
  
• Direct labor - These include wages and salaries of workers and employees.
  
• Transaction fees- These include costs which are incured for making a transaction such as credit card charges etc
  
• Commissions - These are the costs which are associated with sales.It is paid on basis of no. of units sold
  
• Utility costs-These include cots like electricity costs, Gas etc. More the production, More these costs will be incurred
  
• Billable labor- These include labour which is paid on the basis of production units.
  
• outward freight cost - These include Costs which are associated Delievering the product to the customers.
  
• Production supplies - These incude costs like oil and grease costs which help in production.
  
• Shipping Costs - These include costs of transprtation required for bringing raw material or delievring finished goods
  
• Packaging Materials cost- These include cost associated with packing of the product made.

A fixed cost is a cost that does not change over the short-term, even if a business experiences changes in its sales volume or other activity levels. This type of cost tends to instead be associated with a period of time, such as a rent payment in exchange for a month of occupancy, or a salary payment in exchange for two weeks of services by an employee. It is of some importance to understand the extent and nature of the fixed costs in a business, since a high fixed-cost level requires a business to maintain a high revenue level in order to avoid generating losses.

Examples of Fixed costs

• Amortization. This is the gradual charging to expense of the cost of an intangible asset (such as a purchased patent) over the useful life of the asset.

• Depreciation. This is the gradual charging to expense of the cost of a tangible asset (such as production equipment) over the useful life of the asset.

• Insurance. This is a periodic charge under an insurance contract.

• Interest expense. This is the cost of funds loaned to a business by a lender. This is only a fixed cost if a fixed interest rate was incorporated into the loan agreement.

• Property taxes. This is a tax charged to a business by the local government, which is based on the cost of its assets.

• Rent. This is a periodic charge for the use of real estate owned by a landlord.

• Salaries. This is a fixed compensation amount paid to employees, irrespective of their hours worked.

• Utilities. This is the cost of electricity, gas, phones, and so forth. This cost has a variable element, but is largely fixed

• Advertising costs -This is the cost which the company incurs to create awareness about its product.

• Legal Expenses-The expenses incurred in legal proceedings and regulations formation of the company are fixed in nature and hence are fixed costs.

Mixed costs are a combination of your fixed and variable costs. Although the fixed portion of a mixed cost remains the same, the variable portion changes along with your sales or production.

Examples of Mixed Costs

• Telephone expense: Varaible Component- cost of calls

Fixed Component cost of the system,cost of the equipment rental

• Automobile lease: Fixed Component - fixed cost per day
    Varaible Component -additional cost per mile for miles driven
• Maintenance expense: Fixed Component - minimum expense equired to keep property open and  occupancy functional
  VariableComponent - additional expense required to keep required with rising
• Labour might be a semi-variable cost. -If you produce more cars, you need to employ more workers; this is a variable cost. However, even if you didn’t produce any cars, you may still need some workers to look after an empty factory.

d) Sunk Costs. These are costs that have been incurred and cannot be recouped. If you left the industry, you could not reclaim sunk costs. For example, if you spend money on advertising to enter an industry, you can never claim these costs back. If you buy a machine, you might be able to sell if you leave the industry.

Examples of Sunk costs

1. Marketing example - Because all businesses market their products and services, a marketing expense is a great example of sunk cost. Any amount of money you spend on marketing or advertising is money you won't get back or recover.

2. Research and development example - As a business owner, you'll likely spend money on the research and development of your upcoming or current products.

3. Training example - Let's say you own a store and you spend $30,000 training your staff on how to use the new software you've installed on your company's computers. After a while, the software is no longer up to par and you discern that need to use a different software. This would require you to train your employees yet again. The $30,000 you spent training your employees for the first software is considered a sunk cost because it will never be recovered.

4. Hiring example - Let's say you own a company and you're looking to hire a new employee. Once you find a promising candidate, you offer them a $5,000 hiring bonus. If this employee is then hired but doesn't end up working out, the $5,000 hiring bonus can be considered a sunk cost. In other words, you won't be seeing the $5,000 hiring bonus again just because you terminated their employment.

5) Factory rent paid - Factory rent already paid is yet another sunk cost.

6) Cost of machinery- The cost incurred in machinery already purchased is sunk cost.

Opportunity cost is the value of something when a particular course of action is chosen. Simply put, the opportunity cost is what you must forgo in order to get something. The benefit or value that was given up can refer to decisions in your personal life, in a company, in the economy, in the environment, or on a governmental level.

Examples of Opportunity Cost

• Someone gives up going to see a movie to study for a test in order to get a good grade. The opportunity cost is the cost of the movie and the enjoyment of seeing it.
• At the ice cream parlor, you have to choose between rocky road and strawberry. When you choose rocky road, the opportunity cost is the enjoyment of the strawberry.
• A player attends baseball training to be a better player instead of taking a vacation. The opportunity cost was the vacation.
• Jill decides to take the bus to work instead of driving. It takes her 60 minutes to get there on the bus and driving would have been 40, so her opportunity cost is 20 minutes.
• This semester you can only have one elective and you want both basket-weaving and choir. You choose basket weaving and the opportunity cost is the enjoyment and value you would have received from choir.
• The opportunity cost of taking a vacation instead of spending the money on a new car is not getting a new car.
• When the government spends $15 billion on interest for the national debt, the opportunity cost is the programs the money might have been spent on, like education or healthcare.
• If you decide not to go to work, the opportunity cost is the lost wages.
• For a farmer choosing to plant corn, the opportunity cost would be any other crop he may have planted, like wheat or sorghum.
• Tony buys a pizza and with that same amount of money he could have bought a drink and a hot dog. The opportunity cost is the drink and hot dog.
• You decide to spend $80 on some great shoes and do not pay your electric bill. The opportunity cost is having the electricity turned off, having to pay an activation fee and late charges. You might also have food in the fridge that gets ruined and that would add to the total cost.

Numerical Example

High Low Method provides an easy way to split fixed and variable components of combined costs using the following formula.

Variable Cost Per Unit:

= (Highest Activity Cost – Lowest Activity Cost) / (Highest Activity Units – Lowest Activity Units)

Once variable cost per unit is found, you can calculate the fixed cost by subtracting the total variable cost at a specific activity level from the total cost at that activity level.

Fixed Cost:

=   Highest Activity Cost – (Variable Cost Per Units x Highest Activity Units)

Example

A company needs to know the expected amount of factory overheads cost it will incur in the following month.

Factory overheads cost in the previous three months was as follows:

Cost Units
Jan $30,000 6,000
Feb $20,000 5,000
Mar $25,000 4,000

Company expects to produce 7000 units in April.

Calculate the expected factory overhead cost in April using the High-Low method.

Solution

Step 1: Identify the highest and lowest activities

Highest activity level is 6000 units in Jan.

Lowest activity level is 4000 units in March.

It is important to remember here that it is the highest and lowest activity levels that need to be identified first rather than the highest/lowest cost.

Step 2: Calculate variable cost per unit

Difference between highest and lowest activity units and their corresponding costs are used to calculate the variable cost per unit using the formula given above.

Variable Cost Per Unit:

= (30,0000 – 25,000) ÷ (6000 – 4000)

= $2.5 Per Unit

Step 3: Calculate fixed cost

Fixed costs can be found be deducting the total variable cost for a given activity level (i.e. 6000 or 4000) from the total cost of that activity level.

Fixed cost = 30,000 – (2.5 x 6000) = $15,000

Step 4: Calculate total variable cost for new activity

Simply multiplying the variable cost per unit (Step 2) by the number of units expected to be produced in April gives us the total variable cost for that month.

Total variable cost = $2.5 x 7000 = $17,500

Step 5: Calculate total cost

Simply adding the fixed cost (Step 3) and variable cost (Step 4) gives us the total cost of factory overheads in April.

Total cost = $15,000 + $17,500 = $32,500