Brief explanation of various types of Costs in Cost Accounting with Examples

Different types of Costs in Cost Accounting

One can understand the cost accounting properly only after knowing various types of cost. Hence, the understanding of types of cost enables proper application of cost accounting principles. Therefore, certain types of cost are briefly explained below.

Types of Costs

Types of Costs

1. Historical Cost: It is the post mortem of cost, which is already incurred. This type of cost reports the past events. If the time lag between the cost incurred time and reporting time is very short, quality decision may be taken. If not so, these costs are irrelevant for decision-making.

2. Future Cost: These types of costs are expected and incurred in the days to come.

3. Replacement Cost: It is the cost required to replaced any existing asset at present.

4. Standard Cost: It is a scientifically predetermined cost, which is arrived at assuming a specific level of efficiency in material utilization, labor and indirect expenses.

5. Estimated Cost: It is an assessment of what will be the cost approximately. It is based on the past experience and adjusted according to the expected future changes.

6. Product Cost: It is the cost of a finished product.

7. Production Cost: It is the combination of both prime cost and absorbed production overhead.

8. Direct Cost: It is a cost, which can be easily identified with a specific saleable cost unit.

9. Prime Cost: It is the aggregation of direct material cost and direct labor cost. The term direct refers to elements of costs, which are easily traceable to a particular unit of output.

10. Indirect Cost: It is the cost, which cannot be easily or directly identified to the unit of output or to the segment of a business operation.

11. Fixed cost: It is otherwise called fixed overhead and period cost. A cost, which is incurred for a specific period and does not get affected by fluctuations in the levels of activity (output or turnover). For example Rent, Salaries and the like.

12. Variable Cost: It is the cost, which is varying or fluctuating according to the levels of activity (output or turnover) in direct proportion.

13. Opportunity Cost: It is the value of a benefit sacrificed in favor of an alternative course of action.

14. Imputed Cost: It is otherwise called Notional Cost and Hypothetical Cost. A cost that has not involve cash outflow from the business organization. It does not appear in the financial records but relevant to the decision-making.

For example: Interest on Capital. CIMA defines notional cost as,

the value of a benefit where no actual cost is incurred.

15. Programmed Cost: A cost which is incurred under any specific programme of an organization. This is reflecting top management policies and decisions.

16. Controllable Cost: It is the cost, which can be influenced by budget holder. In other words, a cost may be controllable by managerial supervision.

17. Non-Controllable Cost: It is the cost that cannot be easily controllable at any level of managerial supervision.

18. Joint Cost: It is the cost of a process, which results in producing more than one main product.

19. Sunk Cost: CIMA defines sunk cost as,

the past cost is not taken into accounts in decision making.

20. Postponable Cost: A cost can be shifted to future with little or no effect on the efficiency of current operations.

21. Out of Pocket Cost: It is the cost which results in cash outflow from the business organization due to a particular managerial decision.

22. Differential Cost: It is the difference of cost between the total costs of two alternatives that are calculated to assist decision-making.

23. Conversion Cost: It is also called production cost. Direct material cost is not included in the production cost. It is the cost incurred for converting the raw material into finished product. In other words, it is the combination of direct labor, direct expenses and factory overhead.

24. Capacity Cost: It is an alternative term used for fixed cost. It is the cost of providing facilities through a system for a particular period. The capacity cost is classified into two categories. They are Standby Cost and Enabling Cost.

25. Standby Cost: It is the cost that is to be incurred continuously even though the operations or facilities are shutdown temporarily. For example, Depreciation.

26. Enabling Cost: It is the cost that is not to be incurred if the operations or facilities are shutdown temporarily.

27. Committed Cost: It is a fixed cost of the company resulted from the earlier decision of the management. For example: Insurance Premium. The amount of insurance premium cannot be controlled at present on a short run basis.

28. Avoidable Cost: It is the specific cost of an activity or a sector of a business that can be avoided if that activity or sector is not in operation.

29. Decision Driven Cost: It is the cost incurred by the company due to its policy decision up to the stage of altering such decision. It does not vary with changes in the level of output or operational activities.

30. Marginal Cost: It is the cost of one more unit of product or service, which can be avoided if that unit is not produced or provided.

31. Quality Related Costs: These are the costs incurred for ensuring and assuring quality as well as the loss incurred even though the quality is not achieved.

Quality related costs are classified as prevention cost, appraisal cost, internal failure cost and external failure cost.

32. Prevention Cost: It is the cost incurred to reduce the appraisal cost to a minimum.

33. Appraisal Cost: It is the cost incurred initially for ascertaining conformance of quality of product according to the requirements. For example: Inspection and testing cost.

34. Internal Failure Cost: A cost is arising from inadequate quality discovered before the transfer of ownership from supplier to purchaser.

35. Relevant Costs: CIMA defines relevant costs

costs appropriate to a specific management decision.

36. Social Responsibility Cost: CIMA defines social responsibility cost as

tangible and intangible costs and losses sustained by third parties or the general public as a result of economic activity.

37. Target Cost: CIMA defines target cost as,

a product cost estimate derived from a competitive market price. Used to reduce costs through continuous improvement and replacement of technologies and processor

38. Inventorial Cost: It is the cost incurred for manufacturing a product and considered as assets under generally accepted accounting principles. For example: Research and Development cost. The inventorial cost becomes expenses when the products are sold.

39. Deferred Cost: The Company does not receive an economic benefit of a cost during the accounting period in which the cost is incurred. Such cost is termed as deferred cost. For example: Prepaid Insurance. It is otherwise called as unexpired expenses or unexpired cost and treated as an asset.

40. Expense: It is an expired cost and the company has received its economic benefit. Moreover, the economic benefit is more than the expired cost. For example: Rent paid for the accounting period.

41. Loss: It is also an expired cost and the company has received its economic benefit. But, the received economic benefit is less than the expired cost.

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