An introduction to cost terms and purposes

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COST AND MANAGEMENT ACCOUNTING




Lecture 2 - An Introduction to Cost Terms and Purposes

- Cost behavior

- Cost Classification

- Cost concept

- Cost ascertainment




Basic Cost Terminologies




Cost : sacrificed resource to achieve a specific objective

Actual cost: a cost that has occurred

Budgeted cost: a predicted cost/forecast cost (relates to an entire
activity)

Standard cost: a predicted cost/forecast cost (relates to per unit
of activity)

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Cost Behaviour


The way in which total cost or cost per unit are affected by fluctuations in the
level of activity.

Assumptions underlying Cost behaviour

Cost belong to one of the following categories:

Entirely fixed
Entirely variable
Semi fixed & semi variable
Based on the following assumptions, the following formula can be constructed

TC = a + b x (Linear equation)




Cost Classification



Direct & indirect cost
Fixed & variable cost
Semi-variable & step cost
Functional cost
Material cost
Labour cost & other expenses
Product & period cost
Avoidable & unavoidable cost