Written by Cost can be defined as the amount of expenditure used up in the process of producing goods or services.
Cost is the value of economic good that has diminished in the process of manufacturing a product or rendering a service.
Cost accounting is a branch of accounting that focuses on the measurement, analysis, and communication of the cost of goods or services.
The purpose of cost accounting is to provide management with information that is required to control and reduce the costs of operations.
Cost Terminologies
There are different terminologies that are associated with cost accounting. Such terminologies are:
1. Cost centre: This is a section, unit or department within an organisation where costs may be attributed and tracked separately.
A cost centre is a collection of activities that a manager wishes to track as a group to better understand the costs incurred to support an organisation.
Cost centres do not directly generate revenue or profit, instead, their main goal is to minimize costs.
Examples of cost centres within an organization include the accounting department, research and development, human resource department, and others.
2. Cost unit: Costs are always related to some object, function, service or good.
For example, we can say the cost of a car, a ton of coal, a haircut etc.
Such units are known as cost units.
A cost unit can be defined as a product or service or activity in relation to which cost is estimated and ascertained.
Cost unit is cost expressed or measured in terms of a specific commodity.
It refers to a unit of measurement for costs incurred by an organization.
For example, the cost unit of the university would be a student, a course and a degree program.
3. Profit centres: These are very similar to cost centres except that profit centres are responsible for both the cost and revenues of the organization.
A profit centre is a section of an organization that is responsible for both generating revenue and managing expenses.
It is created for the collection of costs and also for profit making.
Most managers create profit centres in order to better control revenue generation and cost increment.
For example, in a chain store, each retail store within the chain can be considered a profit centre.
Each store is responsible for generating revenue and managing its own expenses, with the goal of maximizing profitability, thus allowing the chain to have a better understanding of the profitability of each store, and to make informed decisions about how to allocate resources and optimize operations to increase profitability across the entire chain.
4. Revenue centres: While cost centres are responsible for cost only, and profit centres are responsible for both revenue and cost, revenue centres are responsible for revenue only.
More formally, a revenue centre is a section or unit of an organization that is responsible for generating revenue.
The main goal of a revenue centre is to maximize sales revenue by generating as much income as possible.
5. Cost apportionment: This is the sharing of costs among two or more cost centres, cost units, or cost objects in proportion to the estimated benefit received.
It is the process of assigning costs that are incurred by various cost objects In order to decide how much of the cost should be allocated to each cost object.
6. Cost allocation: This is the charging of discrete, identifiable items of costs to cost centres or cost units.
It is the systematic assignment of costs to the relevant cost centres in order to accurately measure the cost of producing a product or service.
7. Cost object: This is anything for which a separate measurement of costs is desired. i.e., products, and services.
A cost object is a specific item or entity for which the cost is being measured and allocated.
In other words, it is the item or entity that is the focus of the cost measurement and allocation process.
A cost object could be a product, service, department, project or any other entity for which cost information is needed.
For example, a producer might allocate the costs of indirect materials and indirect labour to each of his product lines.
In this case, the cost object would be considered the cost object.
8. Investment centres: An investment centre is a unit of an organization responsible for generating profits and making capital investments.
Unlike cost and revenue centres, which focus on controlling costs and generating revenue respectively, investment centres focus on maximizing returns on investment.
As a result, the performance of an investment centre is typically evaluated based on its returns on Investment (ROI).
9. Costs: Cost is a measurement of resources required or sacrificed to accomplish an objective.
It is a resource sacrificed or forgone to achieve a specific objective or purpose.
Cost may also be defined as the amount of expenditure incurred to produce a good or render a service.
Costs can be classified based on several criteria. But one of the most popular methods of cost classification is based on traceability.
Based on traceability, costs may be classified into direct costs and indirect costs.
Direct costs are costs that are directly related to the manufacturing of a particular good or service. Examples are direct materials and direct labour costs.
Indirect costs, on the other hand, are expenses that cannot be easily traced to a specific product or service, such as indirect labour, rent, and utilities.
It is crucial to remember that costs are not limited to monetary expenditures only, but can also include the opportunity cost, which is the value of the next best alternative that must be given up in order to pursue a particular course of action.
