The techniques and process of ascertaining cost involve three steps
- collection of expenditure or cost date
- classification of expenditure as per cost elements,function etc and
- Allocation and apportionment of expenditure to the cost centers and cost units
The System accumulates and classifies expenditure according to the elements of cost and then the accummulated expenditure is allocated and apportioned to the cost objects i.e cost centres and cost units
For this we should understand the term cost centres, cost units and cost elements
Cost centres:-Cost centre is defined as a location or any equipment or person in respect with the cost to be ascertained for the purpose of cost control.
Cost Units:- Cost unit is unit of product service or a combination of them in relation to which costs are ascertained or expressed.
Element of costs:- Elements are related to the process of manufacturing i.e the conversion of raw material in to final product.Cost are normally broken in to three basic part, material ,labour and expenses.
Each of the cost element can be again divided in to direct and indirect costs.
The cost which is identifiable to cost centre is to be allocated to the cost centre. and if suppose cost not able to allocate directly to the cost centre can be apportioned to the production cost centre.
Cost management is use full for cost control and cost reduction by providing the accountability to each cost centre.
Classification of cost:-
- By nature of expenses i.e material,labour,Expenses
- By relation to the cost centre. i.e direct , indirect cost
- By Function i.e Production. selling and R and d Expenditure etc.
- By behaviour i.e fixed ,Variable, semivariable
- For management decision making i.e Marginal cost ,opportunity cost, Avoidable cost ,etc
- By nature of production process i.e batch cost,process cost,joint cost etc
- By time :- i.e Historical cost,standard cost, estimated cost etc