CHAPTER 1

Costs
Costs can be defined as the resource expended towards the accomplishment of a specific objective. Costs are usually measured in monetary terms being the amount that has to be paid for goods and services, usually raw materials and labor. Costs are broadly classified into actual and budget costs. Actual costs are historical while budgeted are projected to occur in the future.
Costs are either direct or indirect. Direct costs are costs that can be traced directly to the cost object, which are materials, labor and machine hours.
Indirect costs are costs that cannot be traced to the cost object but are necessary for its accomplishment. They fall under the broad category of overheads which include supervisors’ salaries, rental or depreciation costs of factory building and equipment, security lighting and allocated costs from service departments.

Fixed & Variable costs
In the short run costs can be further classified into fixed and variable. Costs that vary with the level of output are essentially variable since more inputs will be required for increased production, particularly with materials. Labor, however, may not behave in the same manner since increased output up to a point can also attributable to learning curve.
In the long run, however, all costs can be variable since normal fixed costs like depreciation can vary due to changes in plant and equipment size. Cost behavior changes over the relevant range of production.

Total & Unit costs
When the performance of a company or a particular segment is being analyzed, total cost of a product against its total revenue is probably sufficient. However, in determining its unit selling price, the unit cost, including overhead application rate, has to be determined. Observing the change in unit cost is also important in determining the marginal production cost.

Period Costs
Period costs are