Question

What Are Costs?

Answer 1

COST IS THE AMOUNT OF MONEY WHICH ENTITY SPENDS FOR RUNNING THE BUSINESS, FOR PRODUCTION, SALE AND SUPPLY OF GOODS AND SERVICES AND FOR OTHER FUNCTIONS.

SOMETIMES COST MAY BE NON CASH ALSO IN TERMS OF DEPRECIATIONS OR AMORTISATIONS ETC.

FOLLOWING ARE THE DIFFERENT TYPES OF COST:

- DIRECT COSTS:

THESE COST ARE DIRECTLY RELATED TO THE OPERATION OF THE BUSINESS WHICH MAY BE PRODUCTION , SALE OR SUPPLY OF GOODS OR SERVICES.

FOR EXAMPLE, COST OF MATERIAL, COST OF LABOR OR DIRECT EXPENSES, VARIABLE OVERHEADS.

THESE COST INCREASE OR DECREASE GENERALLY IN THE SAME PROPORTION TO THE NO. OF UNITS PRODUCED OR SOLD OR SERVICES PERFORMED

- INDIRECT COST

THESE COST ARE INCURRED TO FACILITATE THE ACTIVITY OF PRODUCTION, SALE OR SUPPLY OF SERVICES. THESE COST ARE NOT DIRECTLY RELATED TO THE ACTIVITY OF PRODUCTION.

EXAMPLES ARE: ELECTRICITY, STAFF SALARY OR RENT PAID FOR THE WHOLE PREMISES.

THESE ARE NOT DIRECTLY TRACEABLE TO ANY PRODCUT OR SERVICES.

THESE SHALL BE ALLOTED TO SERVICES OR PRODUCTS BASED ON ANY REASONABLE RATIOS.

- FIXED COST

THESE COST ARE RELATIVELY FIXED IN NATURE FOR A PARTICULAR PRODUCTION CAPACITY. THEY CHANGE WITH THE INCREASE IN PERIOD. THEY DO NOT VARY DIRECTLY WITH THE NO. OF SERVICES PERFORMED OR GOODS PRODUCED OR SOLD.

FOR EXAMPLE , RENT OF THE BUILDING, DEPRECIATION,

- VARIABLE COST:

THESE COST DIRECTLY CHANGE WITH THE NO. OF SERVICES PERFORMED OR GOODS PRODUCED.

FOR EXAMPLE, DIRECT MATERIAL COST, PACKAGING COST, DIRECT LABOR COST, SALES COMMISSION PAID

- OPERATING COST:

THESE ARE COSTS INCURREED FOR DAY TO DAY BUSINESS ACTIVITY. THESE IS INCURRED FOR ALL GENERAL FUNCTIONS FOR ALL PRODUCT OR SERVICES.IT CAN NOT BE CHARGED TO ANY ONE PRODUCT.

- OPPORTUNITY COST:

THESE IS A NOTIONAL COST. THESE IS NOT THE CASH EXPENSE. IT IS THE COST OF SACRIFYING EXPECTED BENEFIT FROM NEXT BEST ALTERNATIVE FOR CHOOSING THE FIRST ONE.

IT IS RELATED TO MUTUALLY EXCLUSIVE OPPORTUNITY EXIST.

- SUNK COST:

THESE ARE HISTORICAL COST WHICH IS ALREADY INCURRED AND CASH OUTFLOW INCURRED. FOR DECISION MAKING IN CURRENT PERIOD, IT BECOMES IRRELEVANT.