MODULE

SECOND Semester, AY 2020-2021

I. COURSE CODE/TITLE : OM 104 PRICING AND COSTING

II. SUBJECT MATTER

SUBJECT MATTER Time-Frame
1.1 Cost l Accounting Overview September 6-10, 2021
1.2 Cost Objects, Cost Centers and Cost Units September 13-17, 2021
1.3 Elements and Classification of Cost September 13-17, 2021
1.4
III. COURSE OUTCOME

1. Cost Accounting Overview

a) Discuss the , Scope, objectives and significance of cost accounting, its relationship with financial
accounting and management accounting Understand the functions of Managerial Accounting in a
business organization
b) Understand and explain the conceptual framework of Cost Accounting

2. Cost Objects, Cost Centers and Cost Units

a) Explain the basic concepts and processes in determination of cost of products and services

3. Elements and Classification of Cost

a) Determine the different elements and classification of Cost
b) Understand that Cost is also different from value as cost is measured in terms of money whereas
value in terms of usefulness.
 WHAT IS COST ACCOUNTING
Cost Accounting - Cost Accounting may be defined as “Accounting for costs classification and analysis of expenditure
as will enable the total cost of any particular unit of production to be ascertained with reasonable degree of accuracy
and at the same time to disclose exactly how such total cost is constituted”. Thus Cost Accounting is classifying,
recording an appropriate allocation of expenditure for the determination of the costs of products or services, and for the
presentation of suitably arranged data for the purpose of control and guidance of management.
Cost Accounting can be explained as follows :
 Cost Accounting is the process of accounting for cost which begins with recording of income and expenditure
and ends with the preparation of statistical data.
 It is the formal mechanism by means of which cost of products or services are ascertained and controlled.
 Cost Accounting provides analysis and classification of expenditure as will enable the total cost of any
particular unit of product / service to be ascertained with reasonable degree of accuracy and at the same time
to disclose, exactly how such total cost is constituted.
 For example, it is not sufficient to know that the cost of one pen is Php 25.00 but the management is also
interested to know the cost of material used the amount of labour and other expenses incurred so as to control
and reduce its cost.
 It establishes budgets, standard costs, and actual cost of operations, processes, departments or products and
the analysis of variances, profitability and social use of funds.
 Thus, Cost Accounting is a quantitative method that collects, classifies, summarises and interprets information
for product costing, operation planning and control and decision-making
Costing : Costing is defined as the technique and process of ascertaining costs.
The technique in costing consists of the body of principles and rules for ascertaining the costs of products and
services. The technique is dynamic and changes with the change of time. The process of costing is the day-to-day
routine of ascertaining costs. It is popularly known as an arithmetic process.
For example If the cost of producing a product say Php 200.00 then we have to refer material, labour and expenses
accounting and arrive the above cost as follows:
Material Php 100.00
Labour Php 40.00
Expense Php 60.00
s
Total Php 200.00

Finding out the breakup of the total cost from the recorded data is a daily process. That is why it is called arithmetic
process/daily routine. In this process we are classifying the recorded costs and summarizing at each element and total
is called technique
Objectives of Cost Accounting:
The following are the main objectives of Cost Accounting:
(a) To ascertain the Costs under different situations using different techniques and systems of costing
(b) To determine the selling prices under different circumstances
(c) To determine and control efficiency by setting standards for Materials, Labour and Overheads
(d) To determine the value of closing inventory for preparing financial statements of the concern
(e) To provide a basis for operating policies which may be determination of Cost Volume relationship, whether to close
or operate at a loss, whether to manufacture or buy from market, whether to continue the existing production.

Cost Accountancy: Cost Accountancy is defined as ‘the application of Costing and Cost Accounting principles,
methods and techniques to the science, art and practice of cost control and the ascertainment of profitability’. It
includes the presentation of information derived there from for the purposes of managerial decision-making. Thus,
Cost Accountancy is the science, art and practice of a Cost Accountant.

Scope of Cost Accountancy

The scope of Cost Accountancy is very wide and includes the following:-
(a) Cost Ascertainment: The main objective of Cost Accounting is to find out the Cost of product / services rendered
with reasonable degree of accuracy.
(b) Cost Accounting: It is the process of Accounting for Cost, which begins, with recording of expenditure and ends
with preparation of statistical data.
(c) Cost Control: It is the process of regulating the action so as to keep the element of cost within the set parameters.
(d) Cost Reports: This is the ultimate function of Cost Accounting. These reports are primarily prepared for use by the
management at different levels. Cost reports helps in planning and control, performance appraisal and managerial
decision-making.
(e) Cost Audit: Cost Audit is the verification of correctness of Cost Accounts and check on the adherence to the Cost
Accounting plan. Its purpose is not only to ensure the arithmetic accuracy of cost records but also to see the principles
and rules have been applied correctly.

Financial Accounting and Cost Accounting: Financial Accounting is primarily concerned with the
preparation of financial statements, which summarise the results of operations for selected period of
time and show the financial position of the company at particular dates. In other words Financial Accounting reports on
the resources available (Balance Sheet) and what has been accomplished with these resources (Profit and Loss
Account). Financial Accounting is mainly concerned with requirements of creditors, shareholders, government,
prospective investors and persons outside the management.
Financial Accounting is mostly concerned with external reporting.
Cost Accounting, as the name implies, is primarily concerned with determination of cost of something, which may be a
product, service, a process or an operation according to costing objective of management. A Cost Accountant is
primarily charged with the responsibility of providing cost data for whatever purposes they may be required for.
The main differences between Financial and Cost Accounting are as follows:

 Cost accounting helps you determine the expenses associated with each of your products. Financial
accounting helps better understand a company’s profitability through its financial statements.

 Cost accounting is a tool used by management to improve business process efficiency. Financial accounting
presents the business’s performance.

 Cost accounting focuses on the internal aspects of a company. Financial accounting focuses on its external
aspects. While cost accounting helps improve a company’s processes, financial accounting is profit-oriented.

 The use of cost accounting is not mandatory in all companies. Only those using manufacturing processes or
activities must use cost accounting. Yet, the use of financial accounting is a must for all organizations.

 Cost accounting is not performed as per any particular period. Rather, it’s performed in a short interval of time
as in the production of a unit or product. Financial accounting records an organization’s financial activity for a
given financial period.

 Additionally, estimation is important in cost accounting. It helps determine the per-unit cost of sales. In
contrast, every transaction in financial accounting is reporting based on actual data.

 Cost accounting uses tools to help improve the efficiency of business operations. These include the cost of
sales, product margin, and selling price of products. Financial accounting uses financial statements, journals,
ledgers, and trial balances.
 There are also differences in presentation between the two methods. Financial accounting requires specific
format parameters. As for cost accounting, the format of reports can vary

The Cost Accounting System has the following advantages:

1. A cost system reveals unprofitable activities, losses or inefficiencies occurring in any form such as
 Wastage of man power, idle time and lost time.
 Wastage of material in the form of spoilage, excessive scrap etc., and
 Wastage of resources, e.g. inadequate utilization of plant, machinery and other facilities.
2. Cost Accounting locates the exact causes for decrease or increase in the profit or loss of the business. It
identifies the unprofitable products or product lines so that these may be eliminated or alternative measures
may be taken.
3. Cost Accounts furnish suitable data and information to the management to serve as guides in making
decisions involving financial considerations.
4. Cost Accounting is useful for price fixation purposes. Although sale price is generally related more to
economic conditions prevailing in the market than to cost, the latter serves as a guide to test the adequacy of
selling prices.
5. With the application of Standard Costing and Budgetary Control methods, the optimum level of efficiency is
set.
6. Cost comparison helps in cost control. Comparison may be period to period, of the figures in respect of the
same unit or factory or of several units in an industry by employing Uniform Costs and Inter- Firm Comparison
methods. Comparison may be made in respect of cost of jobs, process or cost centres.
7. A cost system provides ready figures for use by the Government, wage tribunals and boards, and labour and
trade unions.
8. When a concern is not working to full capacity due to various reasons such as shortage of demands or
bottlenecks in production, the cost of idle capacity can readily worked out and repealed to the management.
9. Introduction of a cost reduction programme combined with operations research and value analysis techniques
leads to economy.
10. Marginal Costing is employed for suggesting courses of action to be taken. It is a useful tool for the
management for making decisions.
11. Determination of cost centres or responsibility centres to meet the needs of a Cost Accounting system
ensures that the organizational structure of the concern has been properly laid responsibility can be properly
defined and fixed on individuals.
12. Perpetual inventory system which includes a procedure for continuous stock taking is an essential feature of a
cost system.
13. The operation of a system of cost audit in the organization prevents manipulation and fraud and assists in
furnishing correct and reliable cost data to the management as well as to outside parties like shareholders,
the consumers and the Government.
Cost is a measurement, in monetary terms, of the amount of resources used for the purpose of production of goods or
rendering services.
Cost in simple, words, means the total of all expenses. Cost is also define as the amount of expenditure (actual or
notional) incurred on or attributable to a given thing or to ascertain the cost of a given thing.
Thus, it is that which is given or in sacrificed to obtain something. The cost of an article consists of actual outgoings or
ascertained charges incurred in its production and sale. Cost is a generic term and it is always advisable to qualify the
word cost to show exactly what it meant, e.g., prime cost, factory cost, etc. Cost is also different from value as cost is
measured in terms of money whereas value in terms of usefulness.
Elements of Cost

Figure 1: Element of Cost

Direct Material + Direct Labour + Direct Expenses = Prime Cost

Indirect Material+ Indirect Labour + Indirect Expenses = Overheads
Direct Material Cost
Direct material cost can be defined as ‘The Cost of material which can be attributed to a cost object in an economically
feasible way’. Direct materials are those materials, which can be identified in the product and can be conveniently
measured and directly charged to the product. Thus, these materials directly enter the product and form a part of the
finished product.
For example, timber in furniture making, cloth in dressmaking, bricks in building a house. The following are normally
classified as direct materials.
 All raw materials, like jute in the manufacture of gunny bags, pig iron in foundry and fruits in canning industry.
 Materials specifically purchased for a specific job, process or order, like glue for book binding, starch powder
for dressing yarn.
  Parts or components purchased or produced, like batteries for transistor radios.
 Primary packing materials like cartons, wrappings, cardboard boxes, etc

Indirect Material Cost

Materials, the costs of which cannot be directly attributed to a particular cost object. Indirect materials are those
materials, which do not normally form a part of the finished product. It has been defined as “materials which cannot be
allocated but which can apportioned to or absorbed by cost centres or cost units”. These are:
 Stores used in maintenance of machinery, buildings, etc., like lubricants, cotton waste, bricks and cements.
 Stores used by the service departments, i.e., non-productive departments like Power House, Boiler House and
Canteen, etc., and
 Materials that due to their cost being small, are not considered worthwhile to be treated as direct materials.
Direct Labour / Employee Cost
The cost of employees, which can be attributed to a cost object in an economically feasible way. In simple words, that
labour can be conveniently identified or attributed wholly to a particular job, product or process or expended in
converting raw materials into finished goods. Wages of such labour are known as direct wages. Thus, it includes
payment made to the following groups of labour:
 Labour engaged on the actual production of the product or in carrying out of an operation or process.
 Labour engaged in adding the manufacture by way of supervision, maintenance, tool setting, transportation of
material etc.
 Inspectors, analysts etc., specially required for such production.
Indirect Labour/ Employee Cost
The labour / employee cost which cannot be directly attributed to a particular cost object. The wages of that labour
which cannot be allocated but which can be apportioned to or absorbed by cost centres or cost units is known as
Indirect Labour. In other words paid to labour which are employed other than on production constitute indirect labour
costs. Example of such labour are: charge-hands and supervisors; maintenance workers; men employed in service
departments, material handling and internal transport; apprentices, trainees and instructors; clerical staff and labour
employed in time office and security office.
Direct or Chargeable Expenses
Direct expenses are expenses relating to manufacture of a product or rendering a service, which can be identified or
linked with the cost object other than direct material cost and direct employee cost.
Direct expenses include all expenditure other than direct material or direct labour that is specifically incurred for a
particular product or process. Such expenses are charged directly to the particular cost account concerned as part of
the prime cost. Examples of direct expenses are: (i) Excise duty; (ii) Royalty; (iii) Architect or Supervisor’s fees; (iv)
Cost of rectifying defective work; (v) Travelling expenses to the city; (vi) Experimental expenses of pilot projects; (vii)
Expenses of designing or drawings of patterns or models; (viii) Repairs and equipment obtained for a contract.
Overhead
Overheads comprise of indirect materials, indirect employee cost and indirect expenses, which are not directly
identifiable or allocable to a cost object. Overheads may defined as the aggregate of the cost of indirect material,
indirect labour and such other expenses including services as cannot conveniently be charged directly to specific cost
units. Thus, overheads are all expenses other than direct expenses. In general terms, overheads comprise all
expenses incurred for or in connection with, the general organization of the whole or part of the undertaking, i.e., the
cost of operating supplies and services used by the undertaking and includes the maintenance of capital assets.
Prime Cost
The aggregate of Direct Material, Direct Labour and Direct Expenses. Generally, it constitutes 50% to 80% of the total
cost of the product, as such, as it is primary to the cost of the product and called Prime Cost.
Cost Object
Cost object is the technical name for a product or a service, a project, a department or any activity to which a cost
relates. Therefore, the term cost should always be linked with a cost object to be more meaningful. Establishing a
relevant cost object is very crucial for a sound costing system. The Cost object could be defined broadly or narrowly.
At a broader level a cost object may be named as a Cost Centre, whereas at a lowermost level it may be called as a
Cost Unit.

Cost Centre
The Chartered Institute of Management Accountants defines a cost centre as “a location, a person, or an item of
equipment (or a group of them) in or connected with an undertaking, in relation to which costs ascertained and used
for the purpose of cost control”. The determination of suitable cost centres as well as analysis of cost under cost
centres is very helpful for periodical comparison and control of cost. In order to obtain the cost of product or service,
expenses should be suitably segregated to cost centre. The manager of a cost centre is held responsible for control of
cost of his cost centre. The selection of suitable cost centres or cost units for which costs are to be ascertained in an
undertaking depends upon a number of factors such as organization of a factory, condition of incidence of cost,
availability of information, requirements of costing and management policy regarding selecting a method from various
choices. Cost centre may be production cost centres operating cost centres or process cost centres depending upon
the situation and classification.
Cost centres are of two types-Personal and Impersonal Cost Centre. A personal cost centre consists of person or
group of persons. An impersonal cost centre consists of a location or item of equipment or group of equipment’s.
In a manufacturing concern, the cost centres generally follow the pattern or layout of the department or sections of the
factory and accordingly, there are two main types of cost centres as below

Production Cost Centre: These centres are engaged in production work i.e. engaged in converting the raw material
into finished product, for example Machine shop, welding shops. Etc.
Service Cost Centre: These centres are ancillary to and render service to production cost centres, for example Plant
Maintenance, Administration. etc.
The number of cost centres and the size of each vary from one undertaking to another and are dependent upon the
expenditure involved and the requirements of the management for the purpose of control.
Responsibility Centre
A responsibility centre in Cost Accounting denotes a segment of a business organization for the activities of which
responsibility is assigned to a specific person. Thus, a factory may be split into a number of centres and a supervisor is
assigned with the responsibility of each centre. All costs relating to the centre are collected and the Manager
responsible for such a cost centres judged by reference to the activity levels achieved in relation to costs. Even an
individual machine may be treated as responsibility centre for cost control and cost reduction.
Profit Centre
Profit centre is a segment of a business that is responsible for all the activities involved in the production and sales of
products, systems and services. Thus, a profit centre encompasses both costs that it incurs and revenue that it
generates. Profit centres are created to delegate responsibility to individuals and measure their performance. In the
concept of responsibility accounting, profit centres are sometimes also responsible for the investment made for the
centre. The profit is related to the invested capital. Such a profit centre may also be termed as investment centre.
Cost Unit
Cost Unit is a device for the purpose of breaking up or separating costs into smaller sub divisions attributable to
products or services. Cost unit can be defined as a ‘Unit of product or service in relation to which costs are
ascertained’. The cost unit is the narrowest possible level of cost object. It is the unit of quantity of product, service of
time (or combination of these) in relation to which costs may be ascertained or expressed. We may determine service
cost per tonne of steel, per tonne-kilometre of a transport service or per machine hour. Sometimes, a single order or
contract constitutes a cost unit, which is known as a job. A batch, which consists of a group of identical items and
maintains its identity through one or more stages or production, may also be taken as a cost unit.
A few examples of cost units are given below
Cost Allocation
When items of cost are identifiable directly with some products or departments such costs are charged to such cost
centres. This process is known as cost allocation. Wages paid to workers of service department can be allocated to
the particular department. Indirect materials used by a particular department can also be allocated to the department.
Cost allocation calls for two basic factors –
(i) Concerned department/product should have caused the cost to be incurred, and
(ii) exact amount of cost should be computable.
Cost Apportionment
 When items of cost cannot directly charge to or accurately identifiable with any cost centres, they are prorated
or distributed amongst the cost centres on some predetermined basis. This method is known as cost
apportionment. Thus, we see that items of indirect costs residual to the process of cost allocation are covered
by cost apportionment. The predetermination of suitable basis of apportionment is very important and usually
following principles are adopted Service or use
 Survey method
 Ability to bear. The basis ultimately adopted should ensure an equitable share of common expenses for the
cost centres and the basis once adopted should be reviewed at periodic intervals to improve upon the
accuracy of apportionment.
Cost Absorption
Ultimately, the indirect costs or overhead as they are commonly known will have to be distributed over the final
products so that the charge is complete. This process is known as cost absorption, meaning thereby that the costs
absorbed by the production during the period. Usually any of the following methods are adopted for cost absorption -
(i) Direct Material Cost Percentage (ii) Direct Labour Cost Percentage (iii) Prime Cost Percentage (iv) Direct Labour
Hour Rate Method (v) Machine Hour Rate, etc. The basis should be selected after careful maximum accuracy of Cost
Distribution to various production units. The basis should be reviewed periodically and corrective action whatever
needed should be taken for improving upon the accuracy of the absorption.
Conversion Cost
This term is defined as the sum of direct wages, direct expenses and overhead costs of converting raw material to the
finished products or converting a material from one stage of production to another stage. In other words, it means the
total cost of producing an article less the cost of direct materials used. The cost of indirect materials and consumable
stores are included in such cost. The compilation of conversion cost is useful in a number of cases. Where cost of
direct materials is of fluctuating nature, conversion cost is used to cost control purpose or for any other decision-
making. In contracts/jobs where raw materials are because of the buyers, conversion cost takes the place of total cost
in the books of the producer. Periodic comparison/review of the conversion cost may give sufficient insight as to the
level of efficiency with which the production unit is operating.
Conversion Cost Formula = Manufacturing Overheads + Direct Labour
Cost Control
Cost Control is defined as the regulation by executive action of the costs of operating an undertaking, particularly
where such action is guided by Cost Accounting. Cost control involves the following steps and covers the various
facets of the management:
Planning: First step in cost control is establishing plans / targets. The plan/target may be in the form of budgets,
standards, estimates and even past actual may be expressed in physical as well as monetary terms. These serves as
yardsticks by which the planned objective can be assessed. Communication: The plan and the policy laid down by the
management are made known to all those responsible for carrying them out. Communication is established in two
directions; directives are issued by higher level of management to the lower level for compliance and the lower level
executives report performances to the higher level.
Motivation: The plan is given effect to and performances starts. The performance is evaluated, costs are ascertained
and information about results achieved are collected and reported. The fact that costs are being complied for
measuring performances acts as a motivating force and makes individuals endeavour to better their performances.
Appraisal and Reporting: The actual performance is compared with the predetermined plan and variances, i.e
deviations from the plan are analysed as to their causes. The variances are reported to the proper level of
management.
Decision Making: The variances are reviewed and decisions taken. Corrective actions and remedial measures or
revisions of the target, as required, are taken.
Advantages of Cost Control
The advantages of cost control are mainly as follows
 Achieving the expected return on capital employed by maximising or optimizing profit
 Increase in productivity of the available resources
 Reasonable price of the customers
 Continued employment and job opportunity for the workers
 Economic use of limited resources of production
 Increased credit worthiness
 Prosperity and economic stability of the industry
Cost Reduction
Profit is the resultant of two varying factors, viz., sales and cost. The wider the gap between these two factors, the
larger is the profit. Thus, profit can be maximised either by increasing sales or by reducing costs. In a competition less
market or in case of monopoly products, it may perhaps be possible to increase price to earn more profits and the
need for reducing costs may not be felt. Such conditions cannot, however, exist paramount and when competition
comes into play, it may not be possible to increase price of products has the ultimate effect of pushing up the raw
material prices, wages of employees and other expenses- all of which tend to increase costs. In the end, substitute
products may come up in the market, resulting in loss of business. Avenues have, therefore, to be explored and
method devised to cut down expenditure and thereby reduce the cost of products.
In short, cost reduction would mean maximization of profits by reducing cost through economics and savings in costs
of manufacture, administration, selling and distribution. Cost reduction may be defined as the real and permanent
reduction in the unit costs of goods manufactured or services rendered without impairing their suitability for the use
intended. As will be seen from the definition, the reduction in costs should be real and permanent. Reductions due to
Windfalls, fortuities receipts, changes in government policy like reduction in taxes or duties or due to temporary
measures taken for tiding over the financial difficulties do not strictly come under the purview of cost reduction. At the
same time a programme of cost reduction should in no way affect the quality of the products nor should it lower the
standards of performance of the business.
Broadly speaking reduction in cost per unit of production may be affected in two ways
 By reducing expenditure, the volume of output remaining constant, and
 By increasing productivity, i.e., by increasing volume of output and the level of expenditure remains
unchanged.
These aspects of cost reduction are closely linked and they act together - there may be a reduction in the expenditure
and the same time, an increase in productivity.
Cost Control vs. Cost Reduction: Both Cost Reduction and Cost Control are efficient tools of management but their
concepts and procedure are widely different. The differences are summarized below:
Classification based on Costs for Management Decision Making

Ascertainment of cost is essential for making managerial decisions. On this basis costing may be
classified into the following types.
Marginal Costing: Marginal Cost is the aggregate of variable costs, i.e. prime cost plus variable overhead. Marginal
cost per unit is the change in the amount at any given volume of output by which the aggregate cost changes if the
volume of output is increased or decreased by one unit. Marginal Costing system is based on the system of
classification of costs into fixed and variable. The fixed costs are excluded and only the marginal costs, i.e. the variable
costs are taken into consideration for determining the cost of products and the inventory of work-in-progress and
completed products.
Differential Cost: Differential cost is the change in the cost due to change in activity from one level to another.
Opportunity Cost: Opportunity cost is the value of alternatives foregone by adopting a particular strategy or
employing resources in specific manner. It is the return expected from an investment other than the present one.
These refer to costs which result from the use or application of material, labour or other facilities in a particular manner
which has been foregone due to not using the facilities in the manner originally planned. Resources (or input) like men,
materials, plant and machinery, finance etc. when utilized in one particulars way, yield a particular return (or output). If
the same input is utilized in another way, yielding the same or a different return, the original return on the forsaken
alternative that is no longer obtainable is the opportunity cost. For example, if fixed deposits in the bank are proposed
to be withdrawn for financing project, the opportunity cost would be the loss of interest on the deposits. Similarly when
a building leased out on rent to a party is got vacated for own purpose or a vacant space is not leased out but used
internally, say, for expansion of the production programme, the rent so forgone is the opportunity cost.
Replacement Cost: Replacement cost is the cost of an asset in the current market for the purpose of replacement.
Replacement cost is used for determining the optimum time of replacement of an equipment or machine in
consideration of maintenance cost of the existing one and its productive capacity. This is the cost in the current market
of replacing an asset. For example, when replacement cost of material or an asset is being considered, it means that
the cost that would be incurred if the material or the asset was to be purchased at the current market price and not the
cost, at which it was actually purchased earlier, should be take into account.
Relevant Costs: Relevant costs are costs which are relevant for a specific purpose or situation. In the context of
decision making, only those costs are relevant which are pertinent to the decision at hand. Since we are concerned
with future costs only while making a decision, historical costs, unless they remain unchanged in the future period are
irrelevant to the decision making process.
Imputed Costs: Imputed costs are hypothetical or notional costs, not involving cash outlay computed only for
decision-making. In this respect, imputed costs are similar to opportunity costs. Interest on funds generated internally,
payment for which is not actually made is an example of imputed cost. When alternative capital investment projects
are being considered out of which one or more are to be financed from internal funds, it is necessary to take into
account the imputed interest on own funds before a decision is arrived at.
Sunk Costs: Sunk costs are historical costs, which are incurred i.e. sunk in the past, and are not relevant to the
particular decision making problem being considered. Sunk costs are those that have been incurred for a project and
which will not be recovered if the project is terminated. While considering the replacement of a plant, the depreciated
book value of the old asset is irrelevant as the amount is sunk cost which is to be written-off at the time of replacement.
Normal Cost & Abnormal Cost: Normal Cost is a cost that is normally incurred at a given level of output in the
conditions in which that level of output is achieved. Abnormal Cost is an unusual and typical cost whose occurrence is
usually irregular and unexpected and due to some abnormal situation of the production.
Avoidable Costs & Unavoidable Costs: Avoidable Costs are those which under given conditions of performance
efficiency should not have been incurred. Unavoidable Costs which are inescapable costs, which are essentially to be
incurred, within the limits or norms provided for. It is the cost that must be incurred under a programme of business
restriction. It is fixed in nature and inescapable.
Uniform Costing: This is not a distinct system of costing. The term applies to the costing principles and procedures,
which are adopted in common by a number of undertakings which desire to, have the benefits of a uniform system.
The methods of Uniform Costing may be extended to be useful in inter-firm comparison.
Engineered Cost: Engineered Cost relates to an item where the input has an explicit physical relationship with the
output. For instance in the manufacture of a product, there is a definite relationship between the units of raw material
and labour time consumed and the amount of variable manufacturing overhead on the one hand and units of the
products produced on the other. The input-output relationship can be established the form of standards by engineering
analysis or by an analysis of the historical data. It should be noted that the variable costs are not engineered cost but
some administration and selling expenses may be categorized as engineered cost.
Out-of-Pocket Cost: This is the portion of the cost associated with an activity that involve cash payment to other
parties, as opposed to costs which do not require any cash outlay, such as depreciation and certain allocated costs.
Out-of-Pocket Costs are very much relevant in the consideration of price fixation during trade recession or when a
make-or-buy decision is to be made.
Managed Cost: Managed (Programmed or Discretionary) Costs all opposed to engineering costs, relate to such items
where no accurate relationship between the amount spent on input and the output can be established and sometimes
it is difficult to measure the output. Examples are advertisement cost, research and development costs, etc.,
Common Costs: These are costs which are incurred collectively for a number of cost centres and are required to be
suitably apportioned for determining the cost of individual cost centres. Examples are: Combined purchase cost of
several materials in one consignment, and overhead expenses incurred for the factory as a whole.
Controllable and Non-Controllable Costs: Controllable Cost is that cost which is subject to direct control at some
level of managerial supervision. Non-controllable Cost is the cost which is not subject to control at any level of
managerial supervision.