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Cost Descriptions Paper - Essay Example

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Fixed Cost refers to those expenses which do not vary with increase or decrease in production level. Total amount of fixed cost remains constant with all levels of production. Fixed cost per unit varies according to the level of production for a given period of time…
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Download file to see previous pages However, the variable cost per unit is fixed for a specific level of production or cost. It will vary in total amount proportionately with some measures of business activity, like costs associated with power, maintenance, etc.
Whereas Direct Cost are those cost which can be traced to a specific cost objective or costs which is easily traceable by per unit and allocated through cost centers. Like direct material, direct labor etc.
Manufacturing Cost is the name of aggregate resources of direct material, direct labor and FOH which is allocated in manufacturing the product. Manufacturing costs are also referred to as production costs. Manufacturing cost also describes how much cost is incurred on each unit produced. By estimating the manufacturing cost, the management is able to value the units produced in a year, cost of goods sold and inventory, which ultimately, is reported in the income statement and balance sheet of the company. Manufacturing costs include all cost from acquisition of material to conversion into finished goods. Packing material, fuel expense, lubricants, depreciation on factory equipments, wages, repair and maintenance, all contribute to the manufacturing cost.
Product Costs are those costs which are identifiable with the product either directly or indirectly. Product cost mainly consists of direct materials, direct labor, and factory overhead. ...
Moreover, if the product is sold it is recorded as Cost of Goods Sold in the books of accounts and then COGS is matched against the revenue (matching principle) generated by selling the product. In short, product costs are those costs which are treated as inventory that is ready for sale. They are treated as assets until the products are sold (Garrison, 2004).
All those cost which are not attributed to product cost are treated as Period Cost. Period cost is treated as expensed and directly reported to income statement in the period when they are incurred. Period cost are not debated over purchase or cost of goods manufactured. Period cost include all selling expenses, general and administration expenses, interest expense and income tax expense (Garrison, 2004). In short, Period costs are reported on the income statement separated from the cost of goods sold section. The period cost is deducted from gross profit. Period cost is not essentially the part of the manufacturing process so therefore period cost is not treated as a cost of inventory (Meigs et al, 1999).
An Opportunity Cost means to get or select the benefit of one alternative by rejecting the other opportunity. It is the cost associated with the best forgone alternative. The opportunity costs is not present in the books of accounts but it is relevant and appropriate with respect to managerial decision making. Like if a students decides to attend summer school rather than accepting a job of making $500 a week, than the true cost of attending school is more than just books, meals, housing etc and the opportunity cost is $500.
Sunk Costs are not relevant in decision making because these costs have been incurred and cannot be changed. Like in the oil exploration ...Download file to see next pagesRead More
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