Accounting Costs

From the standpoint of financial control and management (incorporating activity like accounting, auditing, costing, budgeting and activities like accounting, auditing, costing, budgeting and tax planning), there are several cost concepts. These are all explicit (outlay) costs to be recorded in books of accounts.

Some of these costs are:

(i) Capital costs: Costs of land, building, machinery, plant and equipment, head office (administrative) expenses

(ii) Overhead costs or fixed overheads (indirect costs)

(iii) Labor and material costs (direct costs)

(iv) Depreciation and replacement, interest on borrowed capital, tax, etc. (period costs).

These costs are often reclassified as:

1. Fixed vs variable vs semi-variable costs, depending upon the degree of variation of these costs with respect to output.

2. Out-of-pocket vs book costs, depending upon the immediacy of expenditure. Book costs can be converted into out-of pocket costs by selling assets and leasing them back the buyer.

3. Traceable vs common costs depending upon the degree of traceability of costs to product, or process (operation) or pattern (technique) or department.

4. Floating vs sunk costs, depending upon activity-related costs or activity-independent cots. For example, amortization of past expenses; depreciation is a sunk cost, but additional cost consequent upon addition activity is a floating cost.

5. Incremental vs marginal costs; both are additional costs of operation or activity, but the latter is narrower than the former. Costs resulting from unit change in product, process or pattern or any activity is marginal, but additional costs from chunk changes in product, etc., is incremental.

From the standpoint of cost planning, cost reduction is a cost control, as a part of financial management, it pays us to identify the profit centre, expense centre and cost centre in an organization. All costs must be identifiable, measurable, and accountable in monetary units and subject to audit and verification – that is what the accountant wants. The accountant may follow various costing techniques like ‘standard costing’, ‘variance analysis’, ‘incremental’ or ‘marginal costing’ towards cost-planning and cost budgeting and even deciding on ‘costs plus pricing strategy’ or ‘price minus costing strategy’. However, almost all of these concepts, measures and techniques are rooted in basic business economics.

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