Brief explanation of various cost concepts

The various cost concepts should be understood by every reader. If so, one can easily understand the standard cost and standard costing. Hence, some of the cost concepts are briefly explained.

1. Estimated Cost

Estimated cost is merely based on the average of past experience or personal opinion about actual costs. In other words, it is the estimation of future cost based on the actual cost or historical cost.

2. Ideal Costs

Ideal costs are incurred under ideal working conditions. It means that certain operating results are obtained due to abnormal conditions. These results are favorable to the management. In other words, the plant is working at more than normal capacity level. Some costs are incurred under this condition. These costs are termed as ideal costs. Generally, perfection is not attainable whenever the men are employed in an organization. The behavior of men is totally unpredictable at any given time. Hence, ideal costs can not be controlled as standard costs.

3. Normal Costs

Normal costs are calculated under the normal level of working of plant and normal efficiency of workers. Workers are engaged in production activities performing their normal functions and efficiency operations are being carried out. Hence, the costs are normal and can not be used for control as standard costs.

4. Current Costs

Current costs are incurred at present under the present working conditions and capacity. Current costs are not useful guide for standard costs. The reason is that present conditions and capacity can be controlled but manageable. The scope of cost control is absent in the current costs.

5. Expected or Anticipated Costs

Expected costs are to be incurred in the days to come by considering past trends and experience as well as future contingencies. The expected costs cannot be used as standard costs since it is just a prediction of actual cost. The standard cost should be fixed just above the normal efficiency.

6. Reasonably Attainable Costs

Costs which can be attained if the management tries for them just above normal level of working efficiency through the integration of group efforts. The management by fixing costs at such a level can make whole hearted efforts to bring down the actual cost to the level of standard. The standard fixed in the above mentioned manner is capable of being altered or modified in accordance with time and nature of the business concern. Thus fixed standards are to be maintained since it is useful guide for long term planning and budgeting.

7. Budgeted Costs

Budgeted costs are the calculation of total costs which should be incurred for a particular period say future period and based on the standard cost. In other words, cost per unit if carefully predetermined is termed as standard cost while total cost if carefully predetermined is termed as budgeted cost. However, both standard cost and budgeted cost are used interchangeably.