GIVE THE DEFINITION and examples
1. Relevant Cost - a managerial accounting term that describes avoidable costs
that are incurred only when making specific business decisions. Useful in making
decisions (should be a differential cost & a future cost ). Example: Assume, for
example, a passenger rushes up to the ticket counter to purchase a ticket for a
flight that is leaving in 25 minutes. The airline needs to consider the relevant
costs to make a decision about the ticket price.
2. Differential Cost - the difference between the cost of two alternative decisions,
or of a change in output levels. For example, if the cost of alternative A is
$10,000 per year and the cost of alternative B is $8,000 per year. The difference
of $2,000 would be differential cost.
3. Controllable Cost - Controllable costs are those over which the company has
full authority, which could be altered in the business operation. Such expenses
include marketing budgets and labor costs.
4. Out of pocket Cost – Employees’ own paid expenses in cash. Out of pocket
costs in managerial accounting are expenses that could be incurred or avoided
depending on management's decisions. For example, increase in production
costs, gasoline fees, tuition fees, etc.
5. Common Cost (allocated, unavoidable)- common cost is an expense associated
with operating a facility, product, or segment that is shared between two or
more departments or users. In other words, it’s a shared expense of creating a
product or providing a service that can’t be attributed to a single department or
user. Example: Bill is the CEO of a small product company in Seattle that has to
visit two different suppliers for two different products Bill’s company produces.
One is in Germany and the other is in Canada. The plane ticket to Germany is
$2,000 and the ticket to Canada is $500. If Bill buys one ticket with a stop in
Canada, he can reduce his costs to $2,000 thus saving his company $500 on the
total trip.
6. Opportunity cost - Opportunity cost is the profit lost when one alternative is
selected over another. A farmer chooses to plant wheat; the opportunity cost is
planting a different crop, or an alternate use of the resources (land and farm
equipment). A commuter takes the train to work instead of driving.
7. Imputed Cost (not incurred but are implied in a given decision) - An
imputed cost is a cost that is incurred or lost by virtue of using an asset instead
of investing it or the cost arising from undertaking an alternative course of
action. For example, if an individual decided to go to graduate school instead of
working at a job, the imputed cost would be the salary they gave up during the
time they are at school. For instance, if a company uses its own buildings for
production, it loses the income from renting it or selling to a third party.
8. Sunk Cost - sunk cost, in economics and finance, a cost that has already been
incurred and that cannot be recovered. For example, your rent, marketing
campaign expenses or money spent on new equipment can be considered sunk
costs. A sunk cost can also be referred to as a past cost.
9. Future Cost - Future costs are those costs expected to be incurred in another
accounting period.
10. Incremental Cost (total)- Incremental cost is the total cost incurred due to an
additional unit of product being produced; also total increase.. To understand
how incremental cost works, assume your business spends $200,000 on
producing 5,000 glass bottles. That means the cost per glass bottle you incur is
$40. You then decide to increase your output and manufacture 10,000 bottles
and spend $250,000 to produce them. That means you will spend $25 per bottle.
To arrive at the incremental cost, you would subtract $250,000 from $200,000.
So, the incremental cost of manufacturing the additional 5,000 glass bottles will
be $50,000. To get the incremental cost per bottle for the 5,000 additional glass
bottles, you would need to divide $50,000 by 5,000, which comes out to $10.
11. Marginal Cost (per unit)- Marginal costs are the costs associated with
producing an additional unit of output. It is calculated as the change in total
production costs divided by the change in the number of units produced.
Marginal costs exist when the total cost of production includes variable costs. For
example, if a company needs to build a new factory in order to produce more
goods, the cost of building the factory is a marginal cost.
12. Discretionary Cost - Discretionary costs (avoidable costs) are costs or capital
expenditures that can be curtailed or even eliminated in the short term without
having an immediate impact on the short-term profitability of a business.
Examples of discretionary costs include advertising, maintenance, training, R&D,
etc.
13. Committed Cost - A committed cost is an investment that a business entity has
already made and cannot recover by any means, as well as obligations already
made that the business cannot get out of. plant and equipment depreciation,
taxes, insurance premium and rent charges. Committed cost is also known as
sunk cost, it is cost which has already been incurred in the past.
