Cost is the amount of resource given up in exchange for some goods or services. The resources given up are money or money’s equivalent expressed in monetary units.
The Chartered Institute of Management Accountants, London defines cost as “the amount of expenditure (actual or notional) incurred on or attributable to a specified thing or activity”.
This activity of a firm may be the manufacture of a product or the rendering of a service which involves expenditure under various heads, e.g., materials, labour, other expenses, etc. A manufacturing organization is interested in ascertaining the cost per unit of the product manufactured while an organization rendering service, e.g., transport undertaking, canteen, Electricity Company, municipality, etc., is interested in ascertaining the costs of the service it renders. In its simplest form, the cost per unit is arrived at by dividing the total expenditure incurred by the total units produced or the quantum of service rendered. But this method is applicable if the manufacturer produces only one product. If the manufacturer produces more than one product, it becomes imperative to split up the total expenditure between the various products so that the cost of each product can be ascertained separately.
For a consumer cost means price for management cost means ‘expenditure incurred’ for producing a particular product or rendering a particular service. The process of ascertaining the cost is known as costing. It consists of principles and rules governing the procedure of finding out the costs of goods/ services. It aims at ascertaining the total cost and also per unit cost. For instance, in transport companies the total cost for the period is ascertained and used to find out the cost per passenger/mile. i.e. the cost of carrying one passenger for one mile. It provides for analysis of expenditure in such a way that the management gets complete idea about even the smallest item of cost.
It is also important to note here that there is no such thing as an exact cost or true cost because no figure of cost is true in all circumstances and for all purposes. Most of the costing information is based on estimates; for example, the amount of overheads is generally estimated in advance; it is distributed over cost units, again on an estimated basis using different methods. Many items of cost of production are handled in an optional manner which may give different costs for the same product without going against the accepted principles in any way. Depreciation is one such item, the amount of which will vary in accordance with the method of depreciation being used. Thus, to arrive at an absolutely correct cost may be quite difficult unless one waits for a long time by which time the costing information may lose all its value.
