Bba 2003 - Cost Accounting

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Product costs are sometimes broken out into the variable and fixed subcategories. This additional information is needed when calculating the break even sales level of a business. It is also useful for determining the minimum price at which a product can be sold while still generating a profit.

(b) Sunk cost and relevant cost

Sunk costs refer to outgoings that have already been incurred and ascended as a result of choices taken in the past. Ruined costs are a type of unrelated cost. Irrelevant costs are costs that do not inspiration executive decision making as they are a thing of the past. Since these costs and savings have already been made they cannot be reversed or recovered, and irrelevant costs such as sunk costs should not be used as a basis for making upcoming conclusions regarding a scheme or investment.

Relevant costs are the costs that are able to impact and influence management decisions. Relevant costs will differ depending on the alternatives and options that a company has to choose among. Other features of relevant cost are that these costs are avoidable in the event that the decision is not taken, can result in opportunity costs to a firm and are incremental costs between the various options under consideration.

Sunk costs and relevant costs are two characteristic types of costs that firms regularly incur in the consecutively of industries. Sunk costs and relevant costs both result in a discharge of cash and can decrease the firm’s profits and profitability levels.

Notwithstanding the fact that they both incur a cost to the firm, there are a amount of chief differences between sunk cost and relevant cost, in terms of the timeline in which each is incurred, and the bearing that they have on making future choices. The article clearly elucidates the thoughts of sunk cost and relevant cost and climaxes the similarities and differences between the two.

(c) Fixed and variable cost

Before you can make decisions about production, sales and costs, you must have a occupied familiarity with cost behavior; you need to know how specific decisions would affect costs. For example, if you select to make another 100 widgets, by how much will your costs rise? How would laying off four employees affect total expenses and profitability? To do this, managerial accountants distinguish between variable and fixed costs. As I explain below, variable costs change with the business activity level, while fixed costs do not. In economics, variable cost and fixed cost are the two main costs a company has when producing goods and services.

A company's total cost is composed of its total fixed costs and its total variable costs. A variable cost is a company's cost that is allied with the quantity of goods or services it produces. A company's variable cost upsurges and reductions with the production capacity. For example, suppose company ABC crops ceramic mugs for a cost of $2 a mug. If the company produces 500 units, its variable cost will be $1,000. However, if the company does not produce any units, it will not have any variable cost for producing the mugs.

On the other hand, a fixed cost does not differ with the capacity of production. A fixed cost does not change with the amount of properties or services a company produces. It leftovers the same even if no goods or facilities are produced. Using the same example above, suppose corporation ABC has a fixed cost of $10,000 per month for the mechanism it uses to foodstuffs mugs. If the company does not produce any mugs for the month, it would still have to pay $10,000 for the cost of renting the machine. On the other hand, if it produces 1 million mugs, its fixed cost remains the same. The variable costs change from zero to $2 million in this example.

(d) Avoidable and unavoidable costs

Avoidable cost is the cost that can be avoided if certain decision is taken or not taken. It is more or less cost which is varied according to the decision taken by management. That is all variable cost can be said to be avoidable.

On the other hand unavoidable cost is that cost which cannot be avoidable at least for the little term. This means that unescapable cost can be said to be more or less a fixed cost in the short term which cannot be changed.

(e) Controllable and uncontrollable costs

Controllable Cost are the costs which can be influenced by the action of a stated member of the undertaking. They are incurred in a specific responsibility centres can be influenced by the achievement of the policymaking heading that responsibility centre. For example, direct labour cost, direct material cost, direct expenses manageable by the shop level management. Uncontrollable Cost are the costs which cannot be influenced by the action of a detailed member of the undertaking. For example: a foreman incharge of a tool room can only control prices pertaining to the same subdivision and the substances which come directly under his control, not the costs assigned to other department. The expenditure which is controllable by an individual may be uncontrollable by another individual.

(f) Direct and indirect costs

Direct costs are ones that can be assoiciated with a particular cost object in an economically feasible way, there can be traced to that object. Indirect costs costs which cannot be accurately attributed to specific cost objects. Direct costs are expenses that can be accurately and easily traced to cost objects. Cost objects may be goods or services, subdivisions or developments. Direct costs can embrace fixed and variable costs. Direct fixed costs can be simply outlined to cost stuffs and do not vary with the level of construction. Direct variable costs vary with production levels. Variable costs are communal expenses that diverge as the manufacture of goods and services varies. Unlike direct costs, variable costs be contingent on the company’s production volume. When a company’s production output level increases, mutable costs increase. Variable costs fall as the production output level reductions.

(g) Prime cost and Conversion cost

The alteration between prime and adaptation costs mentions to the difference in the types of costs and what they are practical to. Prime costs are fundamentally the cost of direct labor and direct materials. Conversion cost is the cost of direct labor cost and manufacturing overhead cost. The term conversion is used because direct labor and manufacturing overhead costs are incurred to convert materials into finished products.