Cost Concept and Estimation

Cost accounting is basically concerned with providing different cost data or information for different purposes. These includes (a) cost data for inventory valuation and income determination (b) cost data for planning and controlling routine operations and (c) cost data for making non-routine decisions, policymaking and long-range planning. The different procedures involved in this regard are cost accumulation, cost classification, cost allocation and cost estimation etc. But before discussing these concepts let us be familiar with the following four terms with which we come across frequently.

1)     Cost: - sacrifice or foregoing of resources made for the attainment of specific purpose is known as cost and are measured as monetary terms. Cost are collected, classified, determined, analyzed and controlled keeping in view the very purpose for which it has been incurred. Cost must be paid for production or purchase of goods and services. Usually costs are incurred with obtain more return or resources in future. Immediate effect of cost is that it causes decrease in assets or in crease in liabilities.

2)     Cost unit:- the chartered institute of management accountants(CIMA), London has defined a cost unit as follows; "A unit of quality of product, service or time(or a combination of these), in relation to which cost may be ascertained or expressed." In other words, cost unit is the appropriate and convenient unit for cost ascertainment or determination that break up or separate costs into smaller subdivision attributable to goods or services.

Industry/Cost unit:-

Automobile/Number, Building/Building/House or square feet, Bricks/1000nos, Carpet/Square foot, Cement/tones, Gas/Cubic foot or Cubic meter, Hospital/Per bed, Ice cream/Per gallon, Power/kilowatt hour, paper/ream, Road construction/Mile, Ready Made Garments/Number, Soft-drinks/Cases, Sugar/Kilogram, Textiles/Meter

3)       Cost centre:- the chartered institute of management accountants(CIMA), London defines cost centers as "a location person or item of equipment ( or a group of these) for which costs may be ascertained and used for the purpose of cost control." In other words, cost center is the appropriate and convenient segment of activity or area of responsibility for which costs are separately accumulated. The person in charge of a cost center is held responsible for control of cost of his control center.

4)     Cost Objective:- An activity or anything for which cost are required or desired to be determined separately is regarded as cost objective. It may be a department, a product, sales territory, passenger mile, patients in hospital, term lending in bank, books in library etc. Cost objective covers both cost centre and cost unit.