Managerial Accounting and Cost Concepts Principles of Managerial Accounting

Sunk costs are historical costs that have already been incurred and will not make any difference in the current decisions by management. Sunk costs are those costs that a company has committed to and are unavoidable or unrecoverable costs. For example, a company decides to buy a new piece of manufacturing equipment rather than lease it.

• Suck costs are costs which the entrepreneur has already incurred and he cannot recover them again now.
• Long-run costs, on the other hand, are the costs which are incurred on the fixed assets like plant, building, machinery, etc.
• Anna buys a piece of machinery that milks the cows she has on her farm.
• The board has issued 24 standards to create a better knowledge of distinct components of cost and better procedures to be used.

Generally, the benefit of the cost is used in the same period in which the corresponding revenue is reported. The formula to compute net operating income, sometimes referred to as net income or net profit, is the organization’s revenues less its expenses. If an organization has more revenue, the resulting number is positive and represents net income or profit. If an organization has more expenses, the resulting number is negative and represents a net loss. The costs on which the output level has a direct impact are known as Variable Costs.

Concept of Costs in terms of Variability

As the term predicts, fixed costs don't change in the volume of output. These costs are constant even with an increase or decrease in the volume of services/ goods produced or sold. Variable costs, in simple words, are a cost that varies according to the outcome of the output.

• The authentic payments undergone by an entrepreneur in employing input are known as outlay costs.
• A firm's cost function adjusts itself according to several factors, such as the scale of the operation, the quantity of the output, the cost of production, and several other factors.
• If the cost is a product cost, classify the cost as direct material (DM), direct labor (DL), or manufacturing overhead (OH).
• Cost accounting is a managerial accounting process that involves recording, analyzing, and reporting a company's costs.
• In every firm, some costs are such they may be postponed for some time and they do not materially affect the production.
• These costs calculate the missed opportunity and calculate income that we can earn by following some other policy.
• These factors include wages to workers employed, prices for the raw materials, fuel and power used, rent for the building he hires, and interest on the money borrowed for doing business, etc.

Cost that remains constant even without the level of production output. Per unit costs which explain the relationship between the cost and output. A health company spends $2 million in R&D to develop a new drug that will slow down aging. At some point, the company finds out that the new drug has side effects and needs to stop producing it. However, some years later, the milking machinery wears out and isn't capable of milking cows anymore. Anna can't sell the machinery or recover any of the $20,000 she has spent on it.

Marginal Cost and Average Cost

For example, a company that owns a factory and doesn't pay rent faces the implicit cost of not renting out the factory but using it for production purposes instead. cost concept These costs are incurred by the business in furtherance of its own objectives. Entrepreneurs spend them for their own private and business interests.

It is the value the goods or services expended to obtain current or future benefits. Private cost implies the cost that is sustained when an individual produces or consumes something. The business person spends his/ her own private or business interests.

responses to “Cost Concepts”

Explicit costs refer to those which fall under actual or business costs entered in the books of accounts. The payments for wages and salaries, materials, license fee, insurance premium, depreciation charges are the examples of explicit costs. These costs involve cash payments and are recorded in normal accounting practices.