Cost centre an identifiable part of an organization for which costs can be calculated
Salary of administrative staff, postage, telegram and telephone, stationery etc. It is the net effect on costs that is important, not just the costs directly avoidable by the contraction. It is the difference in total cost that will arise from the selection of one alternative to the other.
In a manufacturing organization, we convert raw materials into a finished product with the help of labor and other services.
Cost classification by behaviour
Cost Classification by Time: i. Operating costs refer to the cost of undertakings which do not manufacture any product but which provide services. Costs reported by conventional financial accounts are based on historical valuations. Such deferred expenses are charged to future production. Sometimes indirect materials like coal, fuel used in kilns etc. It can also be defined as any cost which is affected by the decision at hand. Gratuity, Profit linked bonus. Rent would then replace depreciation and interest. The controllability of cost depends upon the level of responsibility under consideration. F Delivery van expenses. Consequently, managers have the authority to make decisions for matters related to product pricing and operating expenses. Contract Cost: It is the cost of a contract with some terms and conditions of adjustment agreed upon between the contractee and the contractor. When a production process is such that from a set of same input, two or more distinguishably different products are produced together, products of greater importance are termed as joint products and products of minor importance are termed as by-products and the costs incurred prior to the point of separation of the products are termed as joint costs.
Predetermined costs may be either standard or estimated. It can also be defined as any cost which is affected by the decision at hand.
Product Cost: The product cost is aggregate of costs that are associated with a unit of product. Ans: Following are normally classified as direct materials: i All raw materials like plastic in the manufacture of bottles, yarn in clothes, and iron in the steel industry.
This type of center is also relevant to manufacturing concerns.
Classification of cost by nature
Postponable Cost: The postponable cost is that cost which can be shifted to the future with little or no effect on the efficiency of current operations. Normal cost includes those items of cost which occur in the normal situation of production process or in the normal environment of the business. Indirect costs Indirect costs are costs which cannot be directly identified with a specific cost unit or cost centre. All the different profit centers within an organization can be ranked from being the most profitable to be the least profitable. Standard costing Many businesses will determine an expected or standard cost at the start of a period and then use this as the basis for evaluating actual costs. It is the sum of direct wages, direct expenses and manufacturing overheads. The replacement cost is a cost of replacing an asset at any given point of time either at present or in the future excluding any element attributable to improvement. Here we discuss the top 6 types of cost centers along with practical examples and its relevance and uses. Other Important terms related to Cost Center Given below are the terms related to the cost pool. Costs of indirect material, indirect labour and indirect expenses in aggregate constitute the overhead costs and are the indirect component of the total cost.
The classification will depend on which asset is being depreciated. Cost variances which are controllable may be termed as avoidable cost. Opportunity costs represent income foregone by rejecting alternatives. Avoidable costs are logically associated with some activity or situation and are ascertained by the difference of actual cost with the happening of the situation and the normal cost.
When spoilage occurs in manufacture in excess of normal limit, the resulting cost of spoilage is avoidable cost.
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