COST CONCEPTS, CLASSIFICATION, USES of COST DATA and COST FLOW

• Cost Accounting measures cost in accordance with plans and needs of

management. It must be based on relevant facts to make a valid decision.
It may have to be computed under different conditions, for different
purposes, by different people . Cost accounting is a means to an end, not
an end in itself.

COST CONCEPTS:
• Accountants, engineers, economist5s and others facing cost problems
have developed cost concepts according to their needs. Basically, a
concepts should be stated in the terms in which it has become generally
familiar.
• Committee on Cost Concepts and Standards of the American Accounting
Association wrote: Cost is a foregoing , measured in monetary terms,
incurred or potentially to be incurred to achieve a specific objective.
• In “A Tentative set of Broad Accounting Principles for Business
Enterprises defined cost as “an exchange in price, a foregoing, a sacrifice
made to secure benefit. It is the amount paid or cash equivalent value
exchanged for goods or services that will give current of future benefits, to
the business enterprise.
• Frequently cost is used synonymously with the term expense and means
an expired cost. But cost is both used to mean asset and expense
• Expense is a sacrifice, the renouncing aspect of the revenue transaction.
The measured outflow of goods and services that are matched with
revenue to determine income.
• Costs are modified with reference to the object costed using descriptions
as, direct, prime, conversion, indirect, fixed, variable, controllable, product,
period, joint, estimated, standard, future, replacement, popportunity,
imputed, sunk, differential and out o pockect.
• For planning, analytical, or in decision making pusposes, accountants
must abandon “book costs” and deal with future, imputed, differential or
opportunity costs.
• Costs must be understood in its relationship to the aims ir purposes which
is to serve.
• Colst data must be accompanied by a a description of the situation in
which the data are to be used, for the same cost data cannot serve all
purposes equally well.

USES of Cost DATA: Collection, presentation and analysis must serve the
following essential uses:

• Planning profit by means of budgets- Planning deals with the future. Costs
accounting provides or budgets the contemplated materials cost, wages,
salaries etc. and management is concerned with the ultimate profit arising
from these costs and planned revenue or sales. Budgeting is the
forecasting of events and effects on profits on varying volumes of activity.
Budgeted material costs and quantities of materials and labor costs and
predetermined quantities of time required to manufacture each product.
These and all other manufacturing costs must be budgeted or determine
first in order to establish the profit base for budgeted sales.

• Controlling Costs via responsibility accounting- Fixing responsibility for

control, limiting the individual’s control effort to controllable costs and
reporting the performance of the individual.
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