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Cost concept  in Management Accounting

 

Cost concept  in Management Accounting

During the time of recession, as revenues shrank and cash flows dwindled for the organizations across the globe, most of them adopted cost-cutting or cost-control methods or strategies to combat this. These strategies proved to be very effective. Cost-control has helped the organizations to prioritize their needs and efficiently generate maximum productivity with minimum inputs.

Definition of cost

“Defines the cost control as “The cost is regulation by executive action of the cost of operating an undertaking particularly where such action is guided by cost accounting”.

Cost is a common denominator into which all the resources of an organization can be translated. Hence whenever an organization attempts to reduce the cost or go in for cost control measures, it should also consider measuring productivity in terms of cost.

What is Productivity?

Productivity may be defined as a measure of output from a production process, per unit of input. It is not an easy metric to be measured. However, measuring productivity in terms of cost would help the management in identifying resources and operations that can be improved to increase the overall productivity of an organisation. Cost as a direct measure of productivity would assist the management in evaluating their decisions in terms of cost saved or profits earned.

Role of Cost Data in Strategic Decision Making

We see that Cost is one of the most important inputs in strategic decision making. Managers may need cost data for the preparation of budgets or making decisions, long term or short term. Different uses of cost data require different classifications and definitions of cost. The term cost is used in many different ways in management accounting. The reason is that there are many different costs, and these are classified differently according to the immediate need of management.

Generally, cost indicates an amount of expenditure (actual or notional) incurred on or assignable to a particular thing and is measured in monetary terms. However, the interpretation of the term cost depends upon the nature of business or industry and the context in which it is used. The term “cost” has to always be used with a prefix or a suffix to be meaningful since cost is always determined with reference to some object or event and the suffix or the prefix explains the nature and limitations of that item of cost.

Cost, Expense and Loss

There is subtle difference between cost, expense and loss. An expense is a cost or expenditure that appears in the financial statements for a given period of time. It is a sacrifice of resources for an economic gain. A cost has an asset attached to it while an expense does not.

Classification of CostsThere are Different Classification of Costs

Ø      Basic Cost Elements :  For the purpose of tracking costs, accounting and control, it is essential to break up cost of a firm into its elements. Cost of manufacturing can normally be broken down into three elements – material, labour and expense.

Ø      Direct Costs : Each of these basic cost elements can be further classified as Direct and Indirect Costs. Direct costs are costs that can be clearly identified with or directly related to the product or services under consideration, so much so that any change . For example, the cost of paper in the manufacture of books is a direct cost.

Ø      Indirect Costs : On the other hand, indirect costs are costs that cannot be identified or directly attributed to a particular product or service in economical way and are generally related to the expenses incurred for maintaining the facilities for such production or services. For example, the depreciation or administration costs are all indirect costs.

 

Therefore Cost is one of the most important inputs in strategic decision-making. Managers may need cost data for the preparation of budgets or making decisions, long term or short term. Different uses of cost data require different classifications and definitions of cost. The term cost is used in many different ways in management accounting. The reason is that there are many types of different costs, and these are classified differently according to the immediate need of management .

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