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Cost Accounting

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Cost

In general, cost means the amount of expenditure incurred on, or attributable to, a given thing. However, the term cost cannot be exactly defined. Its interpretation depends upon:

(i) The nature of the business, or industry and

(ii) The context in which it is used.

In a business where selling and distribution expenses are quite normal, the cost of the article may be calculated without considering the selling and distributing overheads. While in a business where the nature of the product requires heavy selling and distribution expenses, calculation of cost without taking into account selling and distribution expenses may prove very costly to the business. Moreover, cost may be factory cost, office cost, cost of sales and even an item of expense is also termed as cost. For example, prime cost includes expenditure on direct materials, direct labour and direct expenses. Money spent on materials is termed as cost of materials, that spent on labour as cost of labour and so on. Thus, the use of the term ‘cost’ without qualification is quite misleading. Again, different cost are found out for different purposes. The work-in-progress is valued at factory cost while stock of finished goods is valued at office cost. Numerous other examples can be given to show that the term ‘cost’ does not mean the same meaning under all circumstances.

The fact that word ‘cost’ cannot be assigned any definite meaning was well-illustrated in Vardon v. The commonwealth case. In that case the price of made-to-order goods of service sold by a trader was fixed by a notification from the Prices Commissioner at “the cost of those goods or service, plus 20% thereof”. The goods in question were suits of clothes and other garments, the material for which was provided by the retailer who rendered certain services in other material required. It was held that cost of a suit by another person who supplied other material required. It was held that cost of a suit of clothes might include costs of distribution and merchandising also. Therefore, the word, cost being uncertain and ambiguous in meaning, the notification could not be regarded as declaring a price.

It may also be noted that there is not such as an exact cost or a true cost because no figure of cost is true in all circumstances and for all purposes. Many items of cost of production are handled in an optional manner which may give different cost for the same product or job without in any way going against the accepted principles of cost accounting. Depreciation is one of such items. Its amount varies in accordance with the method of depreciation being used. However, endeavor should be to obtain as far as possible accurate cost of a product or service.