Cost Analysis Cost Data For Business Decisions Cost
Cost Analysis: Cost Data For Business Decisions; Cost concepts and Classifications; Cost relationships; Cost Determinants
� Cost plays an important role in managerial decisions � The kind of cost to be used in a particular situations depends upon the business decisions to be made. � It is important to understand the various concepts of costs, how it can be defined and opertionalized.
� Business executives not infrequently wish to make cost for purposes other than the determination of profits like payment of tax , dividends. � They want to determine, �The profitable rate of operation of a department or plant. �They want to decide what price to quote to the customer. �They need to know whether to accept a particular order.
�They may want to know whether it would be profitable to buy a new machine. �They want to decide the sales channels to use. �If increase the production by using new machines, costs of materials to be purchased and labor should appoint, these are factors to be considered. �But depreciation on machine is not a factor �Expenses and factors are different. �These are considered by the business executives in his managerial decision making.
� Production can be expanded without addition to the existing plant, fixed expenses not considered. � But the proposal is one which involves building a new plant fixed expenses connected with that plant must be taken into account. � In considering these problems, a businessman, makes use of figures from his accounting rewards.
� But cost relevant to decision making found from reclassification, additions, repricing of input factors or decisions.
� The kind of cost concept to be used in a particular situation depends upon the business decisions to be made.
� Actual cost means the actual expenditure incurred for production of goods or services. � These costs are the costs that are recorded in the books of accounts � For example: actual wages paid, cost of materials purchased, interest paid. � these cost also known as absolute costs or outlay costs.
� Opportunity cost of good ot services is measured in terms of revenue. � Therefore opportunity cost is the expected returns from the second best use of the resources. � Opportunity cost is also known as alternative cost. � Example: suppose a person has a sum of Rs. 100000 which he has only two alternative uses � He can buy machine A or machine B � A 20000 � B 15000
� Incremental is the additional cost due to a charge in the level or nature of business activity. � Changes may be addition of a new productline, changing the channel of distribution, adding new machine. � Sunk cost, which is not affected or altered by a charge in the level or nature of business activity. � It will remain the same whatever the level of activity � Example: depreciation.
� Past costs are actual costs incurred in the past and recorded in the books of accounts � Management will absorb and evaluate the past cost and they find any exercise costs and try to reduce while taking decisions. � Future costs are costs that are reasonably expected to be incurred in some future period. � Management forecast the future cost fo higher but they try to reduce.
� Short run costs are costs that vary with output when fixed plant and capital remain the same. � Long run costs are cost which vary with output when all inputs factors vary (plant and capital).
� Total cost could be divided into two components, ( fixed and variable) � Fixed cost remains constant when output increases to certain level. � These will not affect the products � Fixed cost will be incurred even when output is nil. � If the total production increase fixed cost per unit will go down and vice versa.
� Direct or traceable cost is one which can be identified easily. � Common or indirect cost are not traceable � Example: salary, electricity.
� These cost which must be incurred in order to continue operations if the firm o=are urgent costs � Example cost of material and labour. � Costs which can be postpone atleast fo sometime � Example: maintenance related to building and machinery
� Out-of-pocket costs refer to costs tat involve current cash payments to outsiders. � Book cost refer to depreciation do not require to pay. � Book costs can be converted into out-ofpockets costs by selling the assets.
� Escapable cost refer which can be reduced. � Unavoidable costs closing an unprofitable branch house storage costs and transportation cost of another branch will increase
� Historical cost means the cost of a plant originally paid for it. � Replacement cost means the price that would have to be paid currently for acquiring the same plant. � Example machine price is 1960 was Rs 15000. � But to replace in 2017 is Rs. 150000.
� Average cost is the total cost divided by the total quantity produced. � Marginal cost is the extra cost of producing one additional unit.
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