An important cost classification in accounting is distinguishing product costs from period costs. In financial accounting, product costs are treated differently than period costs. As a general rule, product costs are capitalized as a part of the inventory asset account; whereas, period costs are expensed as incurred. The costs on which the output level does not have a direct impact are known as Fixed Costs. For example, salary of staff, rent on office premises, interest on loans, etc.
This special model will be produced by the newly-formed Hennessey Special Operations (HSO) department which will produce just 15 to 20 vehicles per year for the firm’s most discerning customers. Production of Hennessey’s Demon 170 will be capped at just 12 units with prices for the upgrades to set customers back approximately $200,000, excluding the cost of the car itself. Suppose a business buys a plot of land for Rs 10,00,000 in the year 2016.
Select financial data for Cincy Chips is provided in Exhibit 1-7. Calculate the variable cost per unit by dividing the difference in cost by the difference in activity. The difference between the highest use and lowest use is assumed to be the variable portion incurred by the difference in activity. Continuing the example from the preceding section, the high-low method can be used to estimate the fixed and variable components of maintenance cost since the cost was identified as mixed. It is important to note that when the relationship between the cost and the activity driver is not perfectly linear, the resulting cost formula is approximate.
For example, the lease of a building will not vary, irrespective of the revenues of a business housed within that facility. A cost may also be a mixture of the two, with a fixed component and a variable component; this is called a mixed cost. Coming to the opportunity costs, it represents the potential benefits missed out by an individual, investor, or even a company when choosing a better option over another. The idea of opportunity costs is a pivotal factor in the cost concept and classification. As per the studies of economics, opportunity costs can be easily overlooked if you are not careful. For this reason, you need to learn more about the cost concept in accounting.
Marginal cost and average cost are two other important costs in economics. The success and efficiency of the firm also depends on its suitable size. The size of the firm cost concept should be optimum as to ensure maximum profitability. The optimum size of the firm is that point which results in the lowest production cost and maximum efficiency.