Question

Explain the following terms and give at least one example for each.

6- Unavoidable costs

7- Common costs

8- Book Value

9- Sunk Costs

10- Inventory Turnover

Answer 1

6. Unavoidable Costs - These are the costs which are bound to occur which means that these costs are not dependent upon the operational decisions being taken by the company.

For Example - Rent of a Factory is not affected whether is less production or more production costs they are bound to occur at same level.

7. Common Costs - These are those costs which you cannot relate to a particular product, department, section, operation, activity etc.These are the costs which are incurred at the organisation level the purpose of which is to facilitate the Operations of the company.

For Example In an Office Building Two Department are working and producing the desired goods and the company is paying for the office building is an example of common costs becuse the same building rent is being used for the both department.

8. Book Value - Book Value refer to the Amount of Figures at which the various accounting components are recorded in the statement of the company without giving the adherence to the market value or present value.

For Example A Depreciable assets like Machinery Book Value is calculated by deduction of accumulated depreciation from cost of the machinery.

8. Sunk Costs - These are the costs which are historical costs or past cost the occurrence of which does not affect the future decision making of the company.They are the past costs hence irrelevant for affecting the business decisions.

For Example Lease Rent of the Factory Building of the Company does not have any role to play in deciding business decision of whether to produce the pencils or pens in the building. It is already incurred so irrelevant for further decision making.

10. Inventory Turnover - Inventory Turnover is a concept which is used to measure how much time the Inventory is used or sold in a period which could be a year , quarter as per the company policies to ensure that the stock are replenished properly and there is no unnecessary piling of stocks over the financial period.

For Example the Fibre for a cloth manufacturing company is its Inventory and the purpose of Inventory Turnover is to oversee in how much the stocks are used and replenishment should be done.