Costs

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Costs

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Cost Defined...

• Cost -- refers to the price a business will pay
  to purchase a product which they would like to
  sell. Cost will also include other expenses
  associated with selling that particular product.
  Cost accounting will become a base for both
  financial and management accounting. Cost are
  incurred in service firms, merchandising firms,
  and in manufacturing firms.

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A. Costs can be divided into five categories

• 1. Manufacturing - Direct Material (raw material)

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2. Non-manufacturing costs

• a) Marketing or selling costs include all cost
  needed to get the product into the hands of the
  customer. Examples advertising, shipping, sales
  travel, commissions, salaries, etc.
• b) Administrative costs include all costs that
  cannot be directly included in manufacturing
  costs or in marketing or selling costs. These
  costs tend to serve the whole organization not
  just manufacturing, sales, etc. Examples general
  accounting, office support staff, public
  relations, etc.

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3. Labour

• a) Direct Labour and Overhead costs are sometimes
  both are referred to as conversion costs.
• At the present time, direct labour costs are
  decreasing, but the other costs (overhead) are
  increasing.
• Direct Labour - examples factory-worker
  salaries, accountant wages.
• Overhead (Indirect Labour) - janitors,
  maintenance workers, and also may include - idle
  time, fringe benefits.

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3. Labour (contd)

• For management to be effective, they have to
  understand labour costs (direct and indirect)
  because if poor decisions are made, these costs
  will definitely be higher than necessary.

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4. Opportunity Costs

• It is the cost of rejecting one alternative for
  another (i.e. profit lost on one product if
  another product is chosen). These costs are not
  entered into the accounting records, but they are
  an integral part of the managers decision making
  process.

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5. Sunk Costs

• It is a cost previously incurred and which would
  not be considered in a management situation.
  (Because it cannot be recaptured or decreased).
  For example initial cost of the sports equipment
  are irrelevant in deciding to run next years
  sports program.