A Study on

Cost concept and nature of cost

A Mini Project Report in Managerial Economics Submitted to JNTU,

Kakinada in Partial Fulfilment for the Award of the Degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted ByAnusha Gopisetty

(Reg. No. 13491E0007).

DEPARTMENT OF MASTER OF BUSINESS ADMINISTRATIONQIS COLLEGE OF ENGINEERING & TECHNOLOGY

An ISO 9001: 2008 Certified Institution and Accredited by NBA (Affiliated to JNTU, Kakinada and Approved by AICTE)

Vengamukkapalem, Pondur RoadONGOLE –523 272.

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CONTENT

S.NO PARTICULARS PAGE NO1 Abstract 32 Introduction 33 Keywords 34 Definition 35 Need to study 36 Scope of study 37 Objectives 48 Methodology 49 Review of literature 510 Cost concept and nature of cost 5-711 Conclusion 712 Reference 7

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Abstract:

The Cost concept denotes a methodology for a project evaluation and also a fundamental concept on economic matters. In this respect, the present article reviews some plain concepts which, if misjudged, may lead to assign an economic meaning to usual results having a strictly financial scope. Lying on this premise, the conclusion focuses on the needing for broader categories to evaluate the economic cost-concept relationships of an investment project.

Introduction:

The managerial economist concerned with making, managerial decisions. Different business proposals are evaluated in terms of their cost and revenues. To know what costs are examined, it is necessary to understand what ‘cost’ is and how to analyse the same.

Keywords: cost; production;

Definition:

The cost of production normally includes the cost of raw materials, labour, and other expenses. This is known as total cost (TC). This is compared with the total revenue (TR) realized on the sale of the products manufactured. The difference between the total revenue and total cost is termed as profit.

( TR-TC = PROFIT)

This is the financial accountant’s interpretation of total cost, total revenue and profit. This may provide base for several legal purposes.

-- (Weldon)--

Need to study:

Financial accounting has certain limitations which have given rise to cost concept. In other words, the emergence of cost accounting is because of the limitations of financial accounting. Cost accounting has many advantages but the extent of the advantages obtained will depend upon the efficiency with which cost system is installed and also the extent to which the management is prepared to accept the system

Scope of study:

 A cost must always be studied in relation to its purpose and conditions. Different costs may be ascertained for different purposes and under different conditions. Work in progress is valued at factory cost while stock of finished goods may be valued at office cost. Even if the purpose of the study of the cost is the same, different conditions may lead to variation in cost.

Objectives:

To know about cost concept and nature of cost

Methodology:

The project is descriptive & exploratory but constructive in nature.

The secondary data is collected through books, journals, magazines

The primary data is collected through descriptive with acumination expect.

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Review of literature: The term”Costing” and “Cost Accounting are often used interchangeably. The chartered institute of management accounts (CIMA) has defined costing as “the techniques and processes of ascertaining costs”.

Weldon - has defined costing as “The classifying, recording and appropriate allocation of expenditure for the dete3rmination of costs, the relation of these costs to sales value and the ascertainment of profitability

COST CONCEPT AND NATURE OF COST:

Cost refers to the expenditure incurred to produce a particular product or service. All costs involve a sacrifice of some kind or other to acquire some benefit.

Ex: If I want to eat food, I should be prepared to sacrifice money.

Costs may be monetary, or non-monetary; tangible, or intangible; determined subjectively or objectively. Social cost such as pollution or noise; psychic costs such as frustration or dissatisfaction resulting from the stress and strain of the modern industrial activities add another dimension to the cost concept.

The cost of production normally includes the cost of raw materials, labour, and other expenses. This is known as total cost (TC). This is compared with the total revenue (TR) realized on the sale of the products manufactured. The difference between the total revenue and total cost is termed as profit.

( TR-TC = PROFIT)

This is the financial accountant’s interpretation of total cost, total revenue and profit. This may provide base for several legal purposes.

The following are the possible variations or different types of the cost:

Long-run Vs Short-run:

Long run is defined as a period of adequate length during which a company may alter all factors of production with higher degree of flexibility. Long-run cost covers the cost of change in the size and kind of plant. Here perfect flexibility in the size of plant, labour force, executive talent and so on.,

Short-run is defined as the period relatively shorter when at least some of the factors of production are fixed. In the short-run it covers the costs associated with the variation in the utilization of fixed plant or other facilities. Degree of flexibility is lacking in the short-run.

Fixed Vs Variable Costs:

Variable costs are differentiated from the fixed costs based on the degree of their variability in relation to the rate of output.

Fixed costs are those costs that are fixed in the short run. Whether the production is taken up or not, we have to incur certain expenses such as rent for factory and office buildings, insurance, telephone, electricity and so on.

Variable costs are those costs that vary with the volume of production. Variable costs comprise the cost of raw materials, wages paid to the labour and soon.

Semi-fixed or semi-variable costs:

Semi-fixed or semi-variable costs refer to such costs that are fixed to some extent beyond which they are variable. Telephone charges or electricity charges from good example for this. If we have connection, we have to pay minimum charges.

Marginal cost:

Marginal cost refers to ‘the additional cost incurred for producing an additional unit’. it equals the change in the variable cost per unit. This change is due to a change in the level of output.

Outlay Cost & Opportunity Cost:

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Outlay cost are those costs that involve cash outflow at sometime these are generally recorded in the books of account.

Ex: Actual wages paid, cost of materials purchases, interest paid etc.,

Opportunity Costs refer to the ‘costs of the next best alternative foregone’ we have scarce resources and all these have alternative uses.

It is the minimum possible alternative earning that might have been earned if the productive capacity& service has been put to some alternative use.

Ex: - Rs. 10, 00,000 can be invested in

Bank Deposit : We can get an interest @ 6% per annum only.

Multiple Funds : We can get an interest @ 9% per annum only.

Any Business : We can get up to 30% interest on investment.

Incremental Cost and Sunk Cost: Incremental cost is the

Incremental costs are the ‘added cost due to a change in the level (or) nature of business activity’. It is also called “differential cost”

Ex :- Addition of a new product line, changing the channel of distribution, Adding a new Machine, Replacing a machine by a better machine, expansion into additional markets etc.,

Sunk costs are those costs that have already been committed in the past. They do not affect the current production.

Ex: -Depreciation.

Past and Future Costs:

Past costs are those costs that have been spent already in the past. they are also called committed costs or historical costs.

Future costs are those costs that will be spent in the future. And these have to be well ascertained now.

Urgent and Postponable Costs:

This classification based on the cost that has priority.

Urgent costs those costs which must be incurred in order to continue operations of the firm are called as urgent costs.

Ex: - the cost of materials and labour which must be incurred if production is to take place.

Out-of Pocket and Book Costs:

This distinction based on the traceability and variability with output.

Out of pocket costs refer to costs that involve an immediate outflow of cash. These are spending in the day-to-day life of the business, such as purchase of raw materials, utility expenses, rent of the premises’ occupied. It is also called explicit costs.

Book costs are those, Such as depreciation do not require current cash expenditure. Book costs can be converted in to out-of-pocket costs by selling the assets and leasing them back from the buyer. It is also called imputed costs.

Ex: the rental payment then replaces the depreciation charge and interest cost of own capital.

Escapable & Unavoidable Costs:

Escapable costs refers to the costs can be saved by reducing the scale of operations to a lower level.

Ex: - Closing Unprofitable Branch House.

Reducing Credit Sales.

Escapable costs are different from controllable and discretionary costs.

Replacement and Historical Costs: 5

Historical Costs means the costs that have been originally spent to acquire the assets. The financial statements are generally based on the historical costs.

Ex: A plant price originally paid for it to acquire.

Replacement cost means the costs that are to be paid currently if the asset were to be replaced.

Ex: price that would have to be paid currently for acquiring same plant.

In 1974, the cost of a machine Rs.15, 000 but now 85,000.

15,000 – Historical Cost, 85,000 – Replacement Cost

Controllable and Non-Controllable Costs:

These costs can be classified as controllable or non-controllable depends upon the level of management. Some costs are not controlled by the shop level.

A controllable cost may be defined as one which is responsible subject to regulation by the executive with whose responsibility that cost is being indentified.

Explicit Vs Implicit costs:

Explicit costs involve payment of cash. the rent for the landlord, wages for the labourer, interest paid on the funds borrowed government taxes and so on. are the explicit costs.

Example: Interest on own character, saving in terms of salary due to own supervision, rent of own premises.

Accounting Cost Vs Economic Cost:

Accounting Cost refers to what are recorded as expenses in the books of accounting records. The Accountant recognizes the cost only when it is incurred and recorded as this necessarily forms the legal point of view.

Example: An Economist evaluates the investment proposals based on their returns after converting them to their present value.

Separable Cost Vs Joint Cost:

These costs are differentiated based on traceability. The costs which can be traced or identified directly with a particular unit, department, or a process of production are called Separable Cost or Direct cost. Ex. Cost of raw materials used for a particular production process or product.

Example: Electricity power for running machines’.

-- (Varshney)--

Conclusion:

The above project explained by the cost concept and nature of cost. This concept explained the classification of cost and also explained different types of cost concepts in this project and nature of cost is explained.

Reference:

1. Atmanand: “Managerial Economics”, Excel Publications. New Delhi, 2012.

2. Varshney, R.L and Maheswari, K L: „’Managerial Economics”, Sultan Chand and Sons, New Delhi, 2102.

3. Narayanan Nadar E, Vijayan S: „’Managerial Economics”, PHI Private Limited, New Delhi, 2009.

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