Cost is a measurement of the economic sacrifice made to achieve a given objective. Thus, it is a measurement of the amount of resources sacrificed in attaining a specified goal. In case of a product, cost represents the monetary
measurement of resources used to mention but a few materials, labor and overheads. From a service point of view, cost is the monetary sacrifice made to provide the service. Accountants generally use cost with other descriptive terms, for example, historical, product, prime, labor or material.
Cost object or cost unit
This is an activity for which a separate measure of cost is desired. It is therefore, a quantitative unit of the product or service in relation to which costs are ascertained. It is determined by the nature of the business enterprise.
c) Cost Accountant
This is a member of the accounting department responsible for collecting product costs and preparing accurate and timely reports to evaluate and control company operations. The person assembles, classifies and summarizes financial and economic data on the production and pricing of goods and services. Some of the roles that the person plays include:
1. Material cost control which includes tracing materials issued to departments, reporting of the cost of material wasted (variance analysis) and provision of information about ordering and holding costs of stocks.
2. Labor cost control which involves time keeping and payroll operation, establishing of standard labor cost for various products, monitoring productivity of labor and analysis of hours worked.
3. Overhead cost planning and control that entails the understanding the cost behavior of cost items, identifying the expenditure on overheads by various departments and establishing the absorption rate guides.
4. Operational efficiency that is concerned with ensuring that maximum output is achieved at minimum cost.
d) Cost Analysis
This is an activity that engages the use of engineering, time and motion studies, timekeeper’s records and planning schedules from production supervisors. Some of the cost analysis techniques include break-even analysis, comparative cost analysis, capital expenditure analysis and budgeting techniques.
(e) Cost center
This is any point at which costs are gathered in order to control cost, fix responsibility and enable costs to be recharged on an equitable basis. A cost centre may be a particular department, a function or items of equipment in respect of which costs may be ascertained and related to cost units for control purposes. For example a manufacturer producing three types of products say A, B and C in separate departments which are called ‘A’ department, ‘B’ department and ‘C’ department. In this scenario, each department can be regarded as a cost centre since the costs incurred in each department will be ascertained separately.
f) Profit centre
This is a cost centre that yields revenue out of the costs incurred. It is further defined as that part of the enterprise which generates revenue. The costs incurred by those cost centres that do not generate revenue are charged to the profit centre.
g) Cost behavior
This is the pattern of change in cost as a result of change in level of activity or production. When production increases, cost also increases and vice versa. Total cost can be divided into fixed and variable costs. Thus, Total cost = fixed cost + variable cost When production increases, fixed cost remain constant whereas variable cost increases with the increase in production.
h) Marginal cost
This is the cost of a unit of a product or service, which would be avoided if that unit or service was not produced or provided