MEANING OF COST
‘COST’ represents a sacrifice of values, a foregoing or a release
of something of value. It is the price of economic resources used as a
result of producing or doing the thing costed. It is the amount of
expenditure incurred on a given thing. Cost has been defined as the
amount measured in money or cash expended or other party
transferred, capital stock issued, services performed or a liability
incurred in consideration of goods and serviced received or to be
received. By cost, we mean the actual cost i.e. historical cost. ICWA
(UK) defines cost as the amount of expenditure (actual or notional)
incurred on, or attributable to a specified thing or activity.
CLASSIFICATION OF COST
Cost classification is the process of grouping costs according to
their common features. Costs are to be classified in such a manner
that they are identified with cost center or cost unit.
ON THE BASIS OF BEHAVIOUR OF COST
Behavior means change in cost due to change in output. On the
basis of behavior cost is classified into the following categories:
FIXED COST
It is that portion of the total cost which remains constant
irrespective of the output upto capacity limit. It is called as a period
cost as it is concerned with period. It depends upon the passage of
time. It is also referred to as non-variable cost or stand by cost,
capacity cost or “period” cost. It tends to be unaffected by variations
in output. These costs provide conditions for production rather than
costs of production. They are created by contractual obligations and
managerial decisions. Rent of premises, taxes and insurance, staff
salaries constitute fixed cost.
VARIABLE COST
This cost varies according to the output. In other words, it is a
cost which changes according to the changes in output. It tends to
vary in direct proportion to output. If the output is decreased,
variable cost also will decrease. It is concerned with output or
product. Therefore, it is called as a “product” cost