Are you struggling to understand the theory of cost?
In business and accounting, the cost is a monetary value that a company has spent to produce a product or a service. To a seller, the cost is the amount of money spent to produce a good. To a buyer, the cost of a product is known as the price. The cost has different meanings in various fields.
Let’s discuss in details the intricacies of cost.
In production, research, retail, and accounting, cost is the value of money that has been used to produce a good or deliver a service.
In business, cost is generally a monetary valuation of efforts, materials, time and utilities consumed. It also includes the cost of risks incurred. In other words, cost is a relationship between the value of production outputs and the level of output. Total cost means the total expense that was incurred to reach a specific output level.
The cost does not include the mark-up for the profit of a company. If a producer was to sell his products at the production price, he would not lose his money on the sales. He would not even make a profit. In the perspective of a buyer, the cost of a product is known as the price. This is the amount that a seller charges for a product. It includes both the production cost and the mark-up that is totalled by the seller to make a profit.
Running a business demands that you keep a track on the financial factors that affect net profits.
In accounting, the term cost explains the monetary value of expenditures for raw materials, equipment, supplies, services, labour, products, etc. Cost is the amount which is recorded as an expense in book-keeping records.
Accounting costs are the costs that have a specific monetary value one needs to pay to gain the associated benefit. Accounting costs are also known as explicit costs. Economic costs include accounting costs. It also includes opportunity costs.
It is necessary for a firm to comprehend the difference between various concepts of cost to take important decisions in business. Various types of economic costs are as follows:
Example: Cost of raw materials, Wage bill, etc.
Example: Rent, salaries, utilities, insurance, etc.
Example: Production supplies, raw materials, billable staff wages, etc.
Example: Administrative cost, maintenance cost, depreciation cost, etc.
Example: Adding or deleting a product from the product line of a company.
Example: Interest payment on borrowed money, utility expenses, etc.
Example: Interest on the equity capital.
Example: Provision for depreciation, and the unpaid amount of interest on the owner’s capital.
Example: During the operating of a vehicle, gasoline, parking, fees, and tolls are considered out-of-pocket expenses for a trip.
Example: All sunk costs are accounting costs.
Example: In the operation of railway services, the cost of wagons, coaches, and engines are direct costs.
Example: The expense of factory building, the track of a railway system, etc.
Example: Maintenance cost, layoff expenses, etc.
A firm should consider these costs before taking significant decisions in business.
The key function of a successful business is to prepare accurate cost estimates. The estimates can be for the internal functioning of a business unit or for a customer. The cost estimate is the approximation of the value of a program, project or operation.
These methods can be used to estimate the cost to complete a project. To improve the reliability of the estimate, you can choose any of the methods given below:
These are some of the significant methods used by successful business companies to estimate cost.
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