Cost Concept of Accounting Characteristics and Relevance

cost concept

This type of analysis can be used by management to gain insight into potentially profitable new products, sales prices to establish for existing products, and the impact of marketing campaigns. Such cost can easily be identified and it is directly concerned with the process of production. Such costs consist of selling costs, office overheads, rent of the building, salaries of security staff, depreciation of the machines etc.

A scatter plot shows if a linear relationship exists between two sets of data – cost and activity driver in this case. If a linear relationship is shown on the scatter plot, then the cost is related to the activity driver. If a linear relationship is not shown on the scatter plot, then the cost is unrelated to the activity driver. A new scatter plot may be prepared to determine if the cost is related to a different activity driver. Alternatively, the cost may increase and decrease randomly, meaning it is not fixed, variable, or mixed. Most recurring costs can be classified as fixed, variable, or mixed.

Elements of Cost

Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. We follow strict ethical journalism practices, which includes presenting unbiased information and cost concept citing reliable, attributed resources. However, some accountants argue that in today’s inflationary environment, many large companies are preparing supplementary information after taking into account changes in purchasing power.

Economic costs help the entrepreneur calculate supernormal profits, i.e. profits he would earn above the normal profits by investing in ventures other than his. Therefore their maintenance expenditure is incurred mainly in periods of slack activity when the rolling stock is comparatively idle. During World War II most maintenance was virtually postponed due to the rush of work in railways as also in other factories. Such postponement of maintenance expenditure tends to create employment during periods of slack activity and thus serves as an anti-cyclical measure. The private and public expenditure, however, serve only as an indicator of ‘public disutility’, they do not give the exact measure of the public disutility or the social costs.

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