Definitions of costs
Definitions of costs:
According to: CP Jaime A. Acosta Altamirano.
Work: Notes on Cost Accounting I.
Variable or direct costs: They are those that tend to fluctuate in proportion to the total volume of production, sale of articles or the provision of a service, are incurred due to the activity of the company.
They are those whose magnitude fluctuates in a direct or almost directly proportional ratio to the changes registered in the volumes of production or sale, for example: direct raw material, direct labor when piecework is paid, income taxes, sales commissions.
Fixed or periodic costs: They are those that in their magnitude remain constant or almost constant, independently of the fluctuations in the volumes of production and / or sale.
They are constant within a certain range of production or sales volumes.
Examples: depreciations (straight-line method), property insurance premiums, rental income, fees for services, etc.
Semi-variable costs: They are those that have a fixed root and a variable element, undergo sudden changes when certain changes occur in the volume of production or sale.
As an example of these: indirect materials, supervision, water, electric force, etc.
• There is no variable cost if there is no production of articles or services.
• The variable cost quantity will tend to be proportional to the production quantity.
• Variable cost is not a function of time. The simple passage of time does not mean that a variable cost is incurred.
Characteristics of the fixed costs.
• They tend to remain the same in total within certain capacity margins, regardless of the volume of production of goods or services achieved.
• They are a function of time.
• The amount of a fixed cost does not change basically without a significant and permanent change in the power of the company, either to produce articles or to provide services.
• These costs are necessary to maintain the structure of the company.
Estimated Costs: Represent only an attempt to anticipate actual costs and are subject to correction as compared to them.
1. Predetermine unit costs of production by estimating the value of direct raw material, direct labor and indirect charges that are considered to be obtained in the future, 2. Subsequently comparing the estimated costs with the real ones and adjusting the corresponding variations.
3. They constitute a predetermined cost system taking into account the experience of previous years.
Indicates what it may cost to produce an item, for which reason said cost will be adjusted to the historical or actual cost.
From the comparison there are discrepancies between the estimated and the real known by the name of variations, which will be a wake-up call that forces us to study the reason for the difference.
According to James A. Cashin.
Work: Fundamentals and techniques of cost accounting.
Prime Costs: These are direct materials and direct labor, costs directly related to production.
Opportunity costs: The measurable value of the benefits that could be obtained by choosing an alternative course of action.
Fixed costs: Those costs whose total remains constant at a relevant level of production, while the unit cost varies with production.
Variable costs: Those costs where the total varies in direct proportion to the changes in volume and the unit cost remains constant.
Semi-variable costs: Are those that have the characteristics of both costs, fixed and variable. It is a cost that varies with production but is not directly proportional to changes in the level of production.
According to: Backer.
Work: Cost Accounting, an administrative approach to Decision Making.
Historical costs: those that were incurred in a certain period.
Predetermined costs: those that are estimated based on statistics and are used to prepare budgets.
Variable costs: change or fluctuate in direct relation to a given activity or volume. This activity can be referred to production or sales, for example: the raw material changes according to the production function and the commissions according to sales.
Fixed costs: those that remain constant within a certain period regardless of whether the volume changes. Example: wages, depreciation, rent, etc.
Discretionary fixed costs: they can be modified, for example: salaries, rent, etc.
Committed fixed costs: those that do not accept modifications also called submerged costs, example: depreciation.
Semi-variable costs: they are made up of a fixed and a variable part, they are examples: public services, electricity, telephone, etc.
Relevant costs: It is modified or changed according to the option adopted, example: when there is a demand for a special order with idle capacity.
Irrelevant costs: those that remain unchanged regardless of the chosen course of action.
Opportunity cost or sacrifice: it is the one that originates when making a certain decision, which causes the renunciation of another type of option that could be considered when carrying out the decision.
Source:
Author: Giovanny E. Gómez
Controllable and uncontrollable costs:
Controllable costs are those that may be directly influenced by unit managers in a given period. For example where managers have the authority of acquisition and use, the cost can be considered controllable by them.
Uncontrollable costs are those that are not directly administered by a certain level of management authority.
Committed fixed costs and discretionary fixed costs:
A committed fixed cost arises out of necessity when you have a basic organizational structure, that is, property, plant and equipment, salaried personnel and others. It is a long-term phenomenon that generally cannot be adjusted downward without adversely affecting the organization's ability to operate, even at a minimum level of productive capacity.
A discretionary fixed cost arises from annual allocation decisions for repair and maintenance costs, advertising costs, training for executives and employees etc. It is a short-term term phenomenon that can generally be adjusted downward, thus allowing the organization to operate at any desired level of productive capacity, taking into account authorized fixed costs.
Relevant and irrelevant costs
A differential cost is determined by the difference between the costs of alternative courses of action on an element-by-element basis. If the cost increases from one alternative to another, it is called an incremental cost; if the cost decreases from one alternative to another, it is called the decremental cost.
When analyzing a specific decision, the key is the differential effects of each option on the company's profits. Variable and incremental costs are often the same. However, in case of a special order, for example, the production is extended beyond the relevant range, the variable costs will be increased as well as the total fixed costs. In that case, the differential of the fixed costs should be included in the decision-making analysis together with the differential of the variable costs.
Opportunity costs:
When a decision is made to pursue a certain alternative, the benefits of other options are abandoned. The benefits lost in ruling out the next best alternative are the opportunity costs of the chosen action.
Since opportunity costs are not actually incurred, they are not included in the accounting records. However, they are relevant costs for decision-making purposes and must be taken into account when evaluating a proposed alternative.
Plant closing costs:
They are the fixed costs that would still be incurred if there were no production. In a seasonal business, management often faces decisions about whether to suspend operations or continue operating during the off-season. In the short term, it is advantageous for the firm to continue operating to the extent that sufficient sales revenue can be generated to cover variable costs and contribute to recovering fixed costs.
The usual silver closing costs to consider when deciding whether to close or stay open are:
• Leases.
• Severance payments.
• Storage and warehousing costs.
• Insurance.
