During the last one and a half decade the economy has undergone many changes and especially in the corporate environment. Business process outsourcing and shifting of manufacturing bases of low cost economies are a testimony to the cost reduction strategies of the corporate world over. A financial manager needs to understand the tools available to manage costs tom ensure that products/services are efficiently produced/delivered. The financial manger also needs to communicate the precise and concise information to the management. The finance manager compares the actual performance with the planned one interprets and reports the result of the operations to all levels of the management and to the owners of the business.
In performing the above tasks, the financial manager has to make use of different management accounting techniques. Costing techniques are important since accounting treatment of costs is complex and financially significant.
In order to understand the correct interpretation of the term cost, it will be appropriate for us to learn about the various types of costs.
(a) Products and Period Costs: The product cost is aggregate of costs that are associated with a unit of product. The product costs may or may not include elements of overhead costs depending upon costing system used,absorption or direct. The period cost is a cost that is attributable to a particular period (accounting year or quarter) and are not affected by level of change during a period.
(b) Common and Joint Cost: The common costs are those costs that are incurred for the general benefit of the whole enterprise. The joint costs are associated with those processes that simultaneously produce two or more products of significant relative sales value.
(c) Short-run and Long-run Costs: Short-run costs are costs that vary with the output when fixed costs (plant and machinery) remains the same and becomes relevant when a firm had to decide whether or not to produce more in the immediate future. The long-run costs are those that vary with output when the quantum of input factors changes including plant and equipments. This cost becomes relevant when the firm has to decide about scaling up the production,expansion, diversification and setting up of new plants.
(d) Past and Future Costs: Past costs are the actual costs incurred in the past. Since there is a time lag between events and reporting of these costs, these costs are often irrelevant for decision-making. The future costs are costs expected to be incurred in future. The future costs are relevant for management decisions of cost control, profit projections, capital expenditure appraisal, expansion, diversification, etc.
(e) Controllable and Non-controllable Costs: The controllable costs are those costs that are chargeable to a budget or cost centre. These costs are controllable by the person in-charge of the cost centre.
In performing the above tasks, the financial manager has to make use of different management accounting techniques. Costing techniques are important since accounting treatment of costs is complex and financially significant.
In order to understand the correct interpretation of the term cost, it will be appropriate for us to learn about the various types of costs.
(a) Products and Period Costs: The product cost is aggregate of costs that are associated with a unit of product. The product costs may or may not include elements of overhead costs depending upon costing system used,absorption or direct. The period cost is a cost that is attributable to a particular period (accounting year or quarter) and are not affected by level of change during a period.
(b) Common and Joint Cost: The common costs are those costs that are incurred for the general benefit of the whole enterprise. The joint costs are associated with those processes that simultaneously produce two or more products of significant relative sales value.
(c) Short-run and Long-run Costs: Short-run costs are costs that vary with the output when fixed costs (plant and machinery) remains the same and becomes relevant when a firm had to decide whether or not to produce more in the immediate future. The long-run costs are those that vary with output when the quantum of input factors changes including plant and equipments. This cost becomes relevant when the firm has to decide about scaling up the production,expansion, diversification and setting up of new plants.
(d) Past and Future Costs: Past costs are the actual costs incurred in the past. Since there is a time lag between events and reporting of these costs, these costs are often irrelevant for decision-making. The future costs are costs expected to be incurred in future. The future costs are relevant for management decisions of cost control, profit projections, capital expenditure appraisal, expansion, diversification, etc.
(e) Controllable and Non-controllable Costs: The controllable costs are those costs that are chargeable to a budget or cost centre. These costs are controllable by the person in-charge of the cost centre.
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