Cost and Management Accounting

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Basic Concept of Cost and Expense

Some of the terms relating to the cost concepts are mentioned below:

  • Expenses
  • Loss
  • Cost Centre
  • Profit Centre
  • Cost Unit
  • Cost Driver

Expenses are the costs incurred by a business to generate revenue and maintain operations.

  • These include all outflows related to the day-to-day activities of a business, such as rent, utilities, salaries, and materials.
  • They are recorded on the income statement and reduce the company’s net income.

A loss occurs when the total expenses exceed the total revenue in a given period.

  • Losses reduce the company’s overall equity and profitability.
  • Loss can also refer to any non-recurring reduction in value, such as a loss on disposal of assets or expenses incurred without any associated revenue (e.g., theft, damage).

A cost centre is a department, segment, or function within a business where costs are tracked and controlled.

  • The primary objective of a cost centre is to monitor and control expenses, supporting overall business efficiency.
  • Examples of cost centres include the HR department, maintenance, and research and development (R&D).

A profit centre is a part of a business responsible for generating revenue and profit.

  • They are accountable for both revenue generation and cost control, with financial performance typically evaluated based on their profit contribution.
  • Examples of profit centres include specific product lines, retail locations, or business divisions.

A cost unit is a unit of product or unit of service to which costs are ascertained by means of allocation, apportionment and absorption.

  • It allows businesses to calculate and analyze costs on a per-unit basis, facilitating accurate pricing and profitability analysis.

A cost driver is a factor that causes a change in the cost of an activity.

  • It’s the element that influences or drives the cost of a particular activity, process, or product. Identifying cost drivers is essential for accurate cost allocation, especially in activity-based costing (ABC) systems.
  • Examples include machine hours, labor hours, or the number of setups required in production.

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