Fixed Cost
These are the costs which remain constants irrespective
of the quantum of output within and up to the capacity that
has been built up. Examples of such costs are: rent, insurance
charges, management salary etc. Fixed Cost is divided into
(i) committed fixed costs and (ii) discretionary fixed costs.
- Committed Fixed Costs: This consists largely of
those fixed costs that arise from the possession of plant,
equipment and a basic organizational structure. For example,
once a building is constructed and plant is installed noting
much can be done to reduce the costs such as depreciation,
property taxes, insurance and salaries of the key personnel
etc., without impairing the organization’s competence to
meet the long-term goals.
- Discretionary Fixed Costs: These are those costs,
which are set at fixed amount for specific time periods
by the management in the budgeting process. These costs
directly reflect top management policies and have no particular
relationship with volume of output. These costs can therefore
be reduced or eliminated entirely, if the circumstances
so require. Examples of such costs are: research and development
costs, advertising and sales promotion costs, donations,
management consulting fees, etc. these costs are also termed
as managed or programmed costs.
Shut Down Cost
Those costs which continue to be incurred even when a
plant is temporarily shut-down, e.g. rent, rates, depreciation,
etc. these costs cannot be eliminated with the closure of
the plant. In other words, all fixed costs, which cannot be
avoided during the temporary closure of a plant, will be known
as shut down costs.
Sunk Costs
Historical costs incurred in the past are known as sunk
costs. They play no role in decision making in the current
period. For example, in the case of a decision relating to
the replacement of a machine the written down value of the
existing machine is a sunk cost and therefore, not considered.
Opportunity Cost
This cost refers to the value of sacrifice made or benefit
of opportunity foregone in accepting an alternative course
of action. For example, a firm financing its expansion plans
by withdrawing money from its bank deposits. In such a case
the lots of interest on the bank deposit is the opportunity
cost for carrying out the expansion plant.
Another example is if an owned building is proposed to be
utilized for housing a new project plant, the likely revenue
which the building could fetch, if rented out, is the opportunity
cost.
Controllable Costs
These are costs, which can be influenced by the action
of a specified member of an organization. For example, the
foreman of a production department can control the utilization
of power or raw material in his department. These are, therefore,
controllable costs as far as he is concerned.
Uncontrollable Costs
Uncontrollable Costs are those costs that cannot be influenced by the action
of a specified member of an undertaking. For example, the
foreman of a production department can control the wastage
of power in his department, but he cannot control the power,
which is being wasted in the powerhouse itself resulting in
higher cost per unit of power to him.
Variable Costs
Variable costs tend to vary with the volume of output.
Any increase in the volume of production result in an increase
in the variable cost and vice-versa. For example, cost of
material; cost of labor, etc.
Imputed or Hypothetical Costs
Imputed or Hypothetical Costs are types of costs which are not recorded in the books of
accounts. These costs are not actually incurred but are considered
while making a decision. For example, in accounting, interest
and rent are recognized only as expenditure when they are
actually paid. But in costing they are charged on a notional
basis while ascertaining the cost of a product. |
Accounts
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