Explain the concepts of costs.
A cost accountant is mainly concerned with the following cost concepts.
1. Concept of objectives: it is this concept that gives direction to the activities related to cost finding, cost analysis, recording and cost reporting. This concept necessities goal congruence, cost exercises have to be in the harmony with objectives. Cost treatment and cost strategies are influences by objectives, which may include internal reporting for operational decisions, internal reporting for specific non repetitive decision and external decision?
2. Concept of materiality: this concept that shares accuracy must be tempered by the good judgement, if no distortion of product cost is likely to result. For example, overhead may include some items of direct cost, which may not be as material as to justify tracing them to a specific unit of production. A particular decision may be useful, but benefit may not be material enough to implement it. Materiality is determined with reference to nature of company's activities managerial policies and competitors practises.
3. Concept of time span: all assumptions relating to different cost exercise remain valid only during related span of time. The statement that cost is fixed is based on a time cost span under consideration. No costs will remain fixed for all the time. Time span selected by a company should be long enough to permit the procedures to record the associated cost, output labour hours and other factors needed in the analysis. if the time span is too short, leads and lags in recording the cost data may be quite troublesome. If the cost relating to a particular time span activity is recorded to another time span activity, cost results may turn out to be quite erroneous.
4. Concept of relevant range of activity: relevant range of activity represents the span of volume over which the cost behaviour is expected to remain valid. Different cost exercise is based on certain range of activity during the period. A fixed cost is fixed only in relation to the relevant range of activity. The relevant range activity may be different b/w firms and for individual firm also, it may change from time to time.
5. Concept of relevant cost and benefit: this cost is vital for the decision making purposes. In evaluating alternative sources of action, management should consider only relevant cost and relevant benefit to alternatives under the consideration. Irrelevant cost and benefits, which are not affected by decision under consideration, are ignored.