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COST- CONCEPTS AND TERMS
Board index ICAI Students Corner Intermediate Paper 10: Cost and Management Accountancy
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COST- CONCEPTS AND TERMS (http://cmaindia.informe.com/forum/paper-10-cost-and-management-

accountancy-f48/cost-concepts-and-terms-t881.html#p2160)
by soumen_7 on Wed Feb 25, 2009 12:43 pm

COST - CONCEPTS AND TERMS

1 Cost - Cost represents the amount of expenditure (actual or notional) incurred on or attributable to a given thing. It
represents the resources that have been or must be sacrificed to attain a particular objective.
2 Pre-determined cost - It is the cost which is computed in advance, before the production starts, on the basis of
specification of all the factors affecting the cost.
3 Standard cost - It is a pre-determined cost which is arrived at, assuming a particular level of efficiency in utilisation of
material, labour and other indirect services. It is the planned cost of a product and is expected to be achieved under a
particular production process under normal conditions. It is often used as a basis for price fixing and cost control.
4 Estimated Cost - It is an approximate assessment of what the cost will be. It is based on past data adjusted to anticipated
future changes.
Although pre-determination is the essence of both standard cost and estimated cost, they differ from each other in the
following respects:
a. Difference in computation
b. Difference in emphasis
c. Difference in use
d. Difference in records
e. Difference in applicability
5 Marginal cost - It is the amount at any given volume of output by which aggregate cost changes if the volume of output
changes increases/decreases) by one unit.
6 Differential cost - It is the difference in the total cost between alternatives calculated to assist decision making Thus, it
represents the change in total cost (both fixed and variable) due to a change in the level of activity, technology, process or
method of production, etc.
7 Discretionary cost - It is an "escapable" or "avoidable" cost. In other words, it is that cost which is not essential for the
accomplishment of a particular objective.
8 Decision-driven cost - It is that cost which is incurred following a policy decision and continues to be incurred till that
decision is altered. It does not vary with changes in output or with operational activities.
9 Managed / Policy cost - It is that cost which is incurred as a matter of policy eg: R & D cost. This cost has two important
features :
a. It arises from periodic (usually annual) decisions regarding the maximum outlay to be incurred
And
b. This cost is not tied to a cause and effect relationship between input and output.
(Note : Decision-driven cost Vs Managed / Policy cost while managed / policy cost arises from periodic decisions (usually
annual), decision-driven cost has no such fixed frequency).
10 Post-ponable cost - It is that cost which can be shifted to the future with little or no effect on the efficiency of the
current operations.
11 Imputed / Notional cost - CIMA defines notional cost as "the value of benefits where no actual cost is incurred". Thus,
imputed cost is that cost which does not involve any cash outlay. Though it is a hypothetical cost, it is relevant for decision
making. Interest on capital, the payment for which is not actually made, is an example of imputed cost.
12 Inventoriable / Product cost - It is the cost which is assigned to the product. For eg : Under marginal costing variable
manufacturing cost. Under absorption costing total manufacturing cost (fixed and variable) constitute product or
inventoriable cost.
13 Opportunity cost - It refers to the value of sacrifice made or benefit of opportunity forgone in accepting an alternative
course of action. For e.g. If Mr. A works in his brothers firm instead of working in X Ltd., then the loss of salary Mr. A
suffers by foregoing employment in X Ltd., is the opportunity cost of working in his brother's firm.
14 Out of pocket cost - It is that portion of total cost which involves cash outlay. It is a short term cost concept and is used
in short- term decision making like make or buy, price fixation during recession. Out of pocket cost can be avoided if a
particular proposal under consideration is not accepted.
15 Joint cost - It is the cost of the process which results in more than one main product.
16 Period cost - It is the cost which is not assigned to the product but is charged as an expense against the revenue of the
period in which it is incurred. All the non-manufacturing costs like administrative, selling and distribution expenses are
treated as period costs.
17 Sunk cost - Historical cost which is incurred in the past is known as sunk cost. This cost is not relevant in decision
making in the current period. For eg. In the case of a decision relating to the replacement of a machine, the written down
value of the existing machine is a sunk cost and hence irrelevant to decision making.
18 Committed cost - It is a fixed cost which results from decisions of prior period and is not subject to managerial control
in the present. Examples of committed cost are depreciation, insurance premium and rent.
19 Shut down cost - The fixed cost which cannot be avoided during the temporary closure of a plant is known as shut down
cost. Examples of shut down cost are depreciation and rent.
20 Relevant cost - CIMA defines relevant cost as " cost appropriate to a specific management decision".
21 Replacement cost - It is the cost of replacement in the current market.
22 Absolute cost - It is the total cost of any product or process. For e.g.: in a cost sheet, both absolute cost and cost per
unit are depicted.
25 Cost allocation - Cost allocation refers to the allotment of whole items of costs to cost centres. For example, if a
worker is employed in department "A", then the wages paid to the worker are allocated or charged to department "A". This
process of charging the entire wages (being cost) of the worker to department "A" is termed as cost allocation.
26 Cost apportionment - It is the process of distributing an item of cost over several cost centres or cost units. Thus, one
item of cost is charged to two or more cost centres or cost units. Normally overheads (indirect costs) are charged to cost
centres or cost units by way of apportionment in proportion to the anticipated benefits.
( Note : Cost allocation Vs Cost apportionment. The former involves the process of charging direct expenditure to cost
centres or cost units while the latter involves the process of charging indirect expenditure to cost centres or cost units.)
27 Cost absorption - It is the process of absorbing the overhead costs (indirect costs) allocated to or apportioned over a
particular cost centre. Thus cost absorption follows cost allocation and cost apportionment. Selection of correct method of
overhead absorption is very important for pricing policies, tenders and other managerial decisions. Overhead absorption is
accomplished through overhead rates. For eg. the overhead costs of a grinding centre may be absorped by using a rate per
" grinding" hour.

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Difference between Various types of Costing (http://cmaindia.informe.com/forum/paper-10-cost-

and-management-accountancy-f48/cost-concepts-and-terms-t881.html#p2161)
by soumen_7 on Wed Feb 25, 2009 12:52 pm

Difference between various Types of Costing

Note : Please note the following distinctions
a. Marginal Costing V/S Absorption Costing
Marginal cost excludes fixed costs. Under absorption costing, even fixed costs are charged to the product/service.
b. Marginal Costing V/S Direct Costing
Under marginal costing only variable cost (both direct and indirect) is charged to the cost unit while under direct costing,
only direct cost ( both fixed and variable) is charged to the cost unit.
c. Absorption Costing V/S Direct CostingUnder absorption costing, all costs (both direct and indirect) are assigned to the
cost unit, whereas under direct costing only direct cost is assigned to the cost unit. In both types of costing, variability of
cost is ignored.
d. Differential Costing V/S Marginal Costing
Differential Costing Marginal CostingScope
Wider than marginal costing. Narrower than differential costing.
Variability
Both fixed and variable costs are considered. Only variable costs are considered.
DefinitionCannot be precisely defined except in terms of increase or decrease in total costs. Can be defined as prime cost
plus variable overheads.
Basis of Decision Making
Comparison of differential cost with incremental / decremental revenue. Margin of contribution and profit volume.
Incorporation in Accounting System
This type of costing does not find a place in the accounting system as it involves future course of action. However, it may
be incorporated in the budgets.
Marginal costs may be incorporated in the accounting system.
Applicability
Applicable to both, long term as well as short term decision making.
Applicable only to short term decision making.
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Re: COST- CONCEPTS AND TERMS (http://cmaindia.informe.com/forum/paper-10-cost-and-

management-accountancy-f48/cost-concepts-and-terms-t881.html#p2235)
by gayatri on Mon Mar 02, 2009 11:46 am

soumen_7 wrote:COST - CONCEPTS AND TERMS

1 Cost - Cost represents the amount of expenditure (actual or notional) incurred on or attributable to a given thing. It
represents the resources that have been or must be sacrificed to attain a particular objective.
2 Pre-determined cost - It is the cost which is computed in advance, before the production starts, on the basis of
specification of all the factors affecting the cost.
3 Standard cost - It is a pre-determined cost which is arrived at, assuming a particular level of efficiency in utilisation of
material, labour and other indirect services. It is the planned cost of a product and is expected to be achieved under a
particular production process under normal conditions. It is often used as a basis for price fixing and cost control.
4 Estimated Cost - It is an approximate assessment of what the cost will be. It is based on past data adjusted to anticipated
future changes.
Although pre-determination is the essence of both standard cost and estimated cost, they differ from each other in the
following respects:
a. Difference in computation
b. Difference in emphasis
c. Difference in use
d. Difference in records
e. Difference in applicability
5 Marginal cost - It is the amount at any given volume of output by which aggregate cost changes if the volume of output
changes increases/decreases) by one unit.
6 Differential cost - It is the difference in the total cost between alternatives calculated to assist decision making Thus, it
represents the change in total cost (both fixed and variable) due to a change in the level of activity, technology, process or
method of production, etc.
7 Discretionary cost - It is an "escapable" or "avoidable" cost. In other words, it is that cost which is not essential for the
accomplishment of a particular objective.
8 Decision-driven cost - It is that cost which is incurred following a policy decision and continues to be incurred till that
decision is altered. It does not vary with changes in output or with operational activities.
9 Managed / Policy cost - It is that cost which is incurred as a matter of policy eg: R & D cost. This cost has two important
features :
a. It arises from periodic (usually annual) decisions regarding the maximum outlay to be incurred
And
b. This cost is not tied to a cause and effect relationship between input and output.
(Note : Decision-driven cost Vs Managed / Policy cost while managed / policy cost arises from periodic decisions (usually
annual), decision-driven cost has no such fixed frequency).
10 Post-ponable cost - It is that cost which can be shifted to the future with little or no effect on the efficiency of the
current operations.
11 Imputed / Notional cost - CIMA defines notional cost as "the value of benefits where no actual cost is incurred". Thus,
imputed cost is that cost which does not involve any cash outlay. Though it is a hypothetical cost, it is relevant for decision
making. Interest on capital, the payment for which is not actually made, is an example of imputed cost.
12 Inventoriable / Product cost - It is the cost which is assigned to the product. For eg : Under marginal costing variable
manufacturing cost. Under absorption costing total manufacturing cost (fixed and variable) constitute product or
inventoriable cost.
13 Opportunity cost - It refers to the value of sacrifice made or benefit of opportunity forgone in accepting an alternative
course of action. For e.g. If Mr. A works in his brothers firm instead of working in X Ltd., then the loss of salary Mr. A
suffers by foregoing employment in X Ltd., is the opportunity cost of working in his brother's firm.
14 Out of pocket cost - It is that portion of total cost which involves cash outlay. It is a short term cost concept and is used
in short- term decision making like make or buy, price fixation during recession. Out of pocket cost can be avoided if a
particular proposal under consideration is not accepted.
15 Joint cost - It is the cost of the process which results in more than one main product.
16 Period cost - It is the cost which is not assigned to the product but is charged as an expense against the revenue of the
period in which it is incurred. All the non-manufacturing costs like administrative, selling and distribution expenses are
treated as period costs.
17 Sunk cost - Historical cost which is incurred in the past is known as sunk cost. This cost is not relevant in decision
making in the current period. For eg. In the case of a decision relating to the replacement of a machine, the written down
value of the existing machine is a sunk cost and hence irrelevant to decision making.
18 Committed cost - It is a fixed cost which results from decisions of prior period and is not subject to managerial control
in the present. Examples of committed cost are depreciation, insurance premium and rent.
19 Shut down cost - The fixed cost which cannot be avoided during the temporary closure of a plant is known as shut down
cost. Examples of shut down cost are depreciation and rent.
20 Relevant cost - CIMA defines relevant cost as " cost appropriate to a specific management decision".
21 Replacement cost - It is the cost of replacement in the current market.
22 Absolute cost - It is the total cost of any product or process. For e.g.: in a cost sheet, both absolute cost and cost per
unit are depicted.
25 Cost allocation - Cost allocation refers to the allotment of whole items of costs to cost centres. For example, if a
worker is employed in department "A", then the wages paid to the worker are allocated or charged to department "A". This
process of charging the entire wages (being cost) of the worker to department "A" is termed as cost allocation.
26 Cost apportionment - It is the process of distributing an item of cost over several cost centres or cost units. Thus, one
item of cost is charged to two or more cost centres or cost units. Normally overheads (indirect costs) are charged to cost
centres or cost units by way of apportionment in proportion to the anticipated benefits.
( Note : Cost allocation Vs Cost apportionment. The former involves the process of charging direct expenditure to cost
centres or cost units while the latter involves the process of charging indirect expenditure to cost centres or cost units.)
27 Cost absorption - It is the process of absorbing the overhead costs (indirect costs) allocated to or apportioned over a
particular cost centre. Thus cost absorption follows cost allocation and cost apportionment. Selection of correct method of
overhead absorption is very important for pricing policies, tenders and other managerial decisions. Overhead absorption is
accomplished through overhead rates. For eg. the overhead costs of a grinding centre may be absorped by using a rate per
" grinding" hour.

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