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

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

Different types of Costs in Cost Accounting Custom Search

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.

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Types of Costs

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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, READ THIS IN MOBILE
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
Replacement cost is the cost required to replaced any existing asset at present. RECENT POSTS
Various stages involved i
4. Standard Cost in Stock Exchange

Standard cost is a scientifically predetermined cost, which is arrived at assuming a specific

level of efficiency in material utilization, labor and indirect expenses. Assumptions of Capital A
Pricing Model

5. Estimated Cost
Estimated cost is an assessment of what will be the cost approximately. It is based on the Personality factors that i
Behaviour of an Employe
past experience and adjusted according to the expected future changes.

6. Product Cost Cost Audit | Meaning | Scope | Obj

Product cost is the cost of a finished product.

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

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8. Direct Cost
Important Characteristic

Direct cost is a cost, which can be easily identified with a specific saleable cost unit.

Methods of Overhead Ab
9. Prime Cost Advantages & Disadvanta

Prime cost 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

Indirect Cost 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

Fixed cost 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

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

13. Opportunity Cost

Opportunity is the value of a benefit sacrificed in favor of an alternative course of action.

14. Imputed Cost

Imputed cost 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 is called
programmed cost. This is reflecting top management policies and decisions.

16. Controllable Cost

Controllable cost 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

Non-controllable cost is the cost that cannot be easily controllable at any level of managerial
supervision.

18. Joint Cost

Joint cost 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
is postponable cost.

21. Out of Pocket Cost

Out of pocket cost is the cost which results in cash outflow from the business organization
due to a particular managerial decision.

22. Differential Cost

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

23. Conversion Cost

Conversion cost 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

Capacity cost 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

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

26. Enabling Cost

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

27. Committed Cost

Committed cost 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

Avoidable cost 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

Decision Driven cost 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

Prevention cost is the cost incurred to reduce the appraisal cost to a minimum.

33. Appraisal Cost

Appraisal cost 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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Summary

Different types of Costs in Cost Accounting

1. Historical Cost
2. Future Cost
3. Replacement Cost
4. Standard Cost
5. Estimated Cost
6. Product Cost
7. Production Cost
8. Direct Cost
9. Prime Cost
10. Indirect Cost
11. Fixed cost
12. Variable Cost
13. Opportunity Cost
14. Imputed Cost
15. Programmed Cost
16. Controllable Cost
17. Non-Controllable Cost
18. Joint Cost
19. Sunk Cost
20. Postponable Cost
21. Out of Pocket Cost
22. Differential Cost
23. Conversion Cost
24. Capacity Cost
25. Standby Cost
26. Enabling Cost
27. Committed Cost
28. Avoidable Cost
29. Decision Driven Cost
30. Marginal Cost
 31. Quality Related Costs
32. Prevention Cost
33. Appraisal Cost
34. Internal Failure Cost
35. Relevant Costs
36. Social Responsibility Cost
37. Target Cost
38. Inventorial Cost
39. Deferred Cost
40. Expense
41. Loss

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