PPT : Theory of Cost | SSC CGL Tier 2 - Study Material, Online Tests, Previous Year PDF Download

 Page 1


CONCEPT OF COST
Cost is defined as those expenses faced 
by a business in the process of supplying 
goods and services to consumers.
Page 2


CONCEPT OF COST
Cost is defined as those expenses faced 
by a business in the process of supplying 
goods and services to consumers.
TYPES OF COST
1) Opportunity Cost And Actual Cost:
Opportunity Cost is the loss of earnings due to lost opportunities.
The opportunity cost may be defined as the loss of expected
returns from the second use of the resources foregone for availing
the gains from their best possible use.
Actual cost are those, which are actually incurred by the payment
of labour, material, plant building, machinery, etc. The total money
expenses, recorded in the books of accounts are, the actual cost.
Page 3


CONCEPT OF COST
Cost is defined as those expenses faced 
by a business in the process of supplying 
goods and services to consumers.
TYPES OF COST
1) Opportunity Cost And Actual Cost:
Opportunity Cost is the loss of earnings due to lost opportunities.
The opportunity cost may be defined as the loss of expected
returns from the second use of the resources foregone for availing
the gains from their best possible use.
Actual cost are those, which are actually incurred by the payment
of labour, material, plant building, machinery, etc. The total money
expenses, recorded in the books of accounts are, the actual cost.
TYPES OF COST
2) Direct Cost and Indirect Cost:
Direct Costs are the costs that have direct relationship with a unit
of operation, i.e. , they can be easily and directly identified or
attributed to a particular product, operation or plant. For Example:
the salary for a branch manager is a direct cost when the branch is
a costing unit.
Indirect cost are those cost whose source cannot be easily and
definitely traced to a plant, a product, a process or a department.
For example: Stationery, depreciation on building, decoration
expenses etc.
Page 4


CONCEPT OF COST
Cost is defined as those expenses faced 
by a business in the process of supplying 
goods and services to consumers.
TYPES OF COST
1) Opportunity Cost And Actual Cost:
Opportunity Cost is the loss of earnings due to lost opportunities.
The opportunity cost may be defined as the loss of expected
returns from the second use of the resources foregone for availing
the gains from their best possible use.
Actual cost are those, which are actually incurred by the payment
of labour, material, plant building, machinery, etc. The total money
expenses, recorded in the books of accounts are, the actual cost.
TYPES OF COST
2) Direct Cost and Indirect Cost:
Direct Costs are the costs that have direct relationship with a unit
of operation, i.e. , they can be easily and directly identified or
attributed to a particular product, operation or plant. For Example:
the salary for a branch manager is a direct cost when the branch is
a costing unit.
Indirect cost are those cost whose source cannot be easily and
definitely traced to a plant, a product, a process or a department.
For example: Stationery, depreciation on building, decoration
expenses etc.
TYPES OF COST
3) Incremental Cost And Sunk Cost:
Incremental cost denote the total additional cost associated with
the marginal batch of output. These costs are addition to the costs
resulting from a change in the nature and level of business activity.
A sunk cost is a cost that an entity has incurred, and which it can no
longer recover by any means. Sunk costs should not be considered
when making the decision to continue investing in an ongoing
project, since these costs cannot be recovered.
For Example : A company spends $20,000 to train its sales staff in
the use of new tablet computers, which they will use to take
customer orders. The computers prove to be unreliable, and the
sales manager wants to discontinue their use. The training is a sunk
cost, and so should not be considered in any decision regarding the
computers.
Page 5


CONCEPT OF COST
Cost is defined as those expenses faced 
by a business in the process of supplying 
goods and services to consumers.
TYPES OF COST
1) Opportunity Cost And Actual Cost:
Opportunity Cost is the loss of earnings due to lost opportunities.
The opportunity cost may be defined as the loss of expected
returns from the second use of the resources foregone for availing
the gains from their best possible use.
Actual cost are those, which are actually incurred by the payment
of labour, material, plant building, machinery, etc. The total money
expenses, recorded in the books of accounts are, the actual cost.
TYPES OF COST
2) Direct Cost and Indirect Cost:
Direct Costs are the costs that have direct relationship with a unit
of operation, i.e. , they can be easily and directly identified or
attributed to a particular product, operation or plant. For Example:
the salary for a branch manager is a direct cost when the branch is
a costing unit.
Indirect cost are those cost whose source cannot be easily and
definitely traced to a plant, a product, a process or a department.
For example: Stationery, depreciation on building, decoration
expenses etc.
TYPES OF COST
3) Incremental Cost And Sunk Cost:
Incremental cost denote the total additional cost associated with
the marginal batch of output. These costs are addition to the costs
resulting from a change in the nature and level of business activity.
A sunk cost is a cost that an entity has incurred, and which it can no
longer recover by any means. Sunk costs should not be considered
when making the decision to continue investing in an ongoing
project, since these costs cannot be recovered.
For Example : A company spends $20,000 to train its sales staff in
the use of new tablet computers, which they will use to take
customer orders. The computers prove to be unreliable, and the
sales manager wants to discontinue their use. The training is a sunk
cost, and so should not be considered in any decision regarding the
computers.
TYPES OF COST
4) Explicit Cost And Implicit Cost:
Explicit costs are those payments that must be made to the factors
hired from outside the control of the firm. They are mandatory
payments made by the entrepreneur for purchasing or hiring the
services of various productive factors which do not belongs to him.
Such payment as rent, wages, interest, etc.
Implicit costs refers to the payment made to the self owned
resources used in production. They are the earnings of o wner ’ s
resources employed in their best alternatives.