Page 112 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 5: Basic Cost Concepts

For Planning and Control Notes

The following are the two major classifications, viz. standard cost and budgetary control:
1. Standard cost: Standard cost is a cost scientifically determined by way of assuming a
particular level of efficiency in utilization of material, labour and indirect expenses.

The prepared standards are compared with the actual performance of the firm in studying
the variances in between them. The variances are studied and analysed through an exclusive
analysis.
2. Budget: A budget is detailed plan of operation for some specific future period. It is an
estimate prepared in advance of the period to which it applies. It acts as a business barometer
as it is complete programme of activities of the business for the period covered.
The control is exercised through continuous comparison of actual results with the budgets. The
ultimate aim of comparing with each other is to either to secure individuals’ action towards the
objective or to provide a basis for revision.

For Managerial Decisions

The major classifications are and marginal cost and sunk cost.
Marginal cost is the amount at any given volume of output by which aggregate costs are changed
if the volume of output is decreased or increased by one unit.
Sunk costs are costs that cannot be recovered once they have been incurred.

Example: Marginal Cost: Suppose it costs 1000 to produce 100 units and 1020 to
produce 101 units. The average cost per unit is 10, but the marginal cost of the 101 unit is
20.
Sunk Cost: Spending on advertising or researching a product idea.
They can be a barrier to entry. If potential entrants would have to incur similar costs, which
would not be recoverable if the entry failed, they may be scared off.

5.5 Cost Ascertainment

Cost denominates the use of resources only in terms of monetary terms. In brief, cost is nothing
but total of all expenses incurred for manufacturing a product or attributable to given thing. In
other words, the cost is nothing but ascertained expression of expenses in terms of monetary,
incurred during its production and sale.
To ascertain a cost, the firm should maintain at least a small division of activity or responsibility
in which costs are accounted, at where the costs are ascertained and controlled. In brief, cost
centre is normally a location where a specified activity takes place.
Accumulation of all cost incurred for an activity leads to ascertainment of cost for the specified
activity, but the control is being done by the head or in-charge of that activity is responsible for
control of costs of his centre.

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