Standard costs, marginal costs are some of the types of cost which helps the management in decision making. DISCUSS any five types of costs…

(a) Type of costs categorised based on its use in Managerial Decision Making Pre-determined Cost - A cost which is computed in advance before production or operations start, on the basis of specification of all the factors affecting cost, is known as a pre-determined cost.Standard Cost - A pre-determined cost, which is calculated from managements 'expected standard of efficient operation' and the relevant necessary expenditure. It may be used as a basis for price fixation and for cost control through variance analysis.Marginal Cost - The amount at any given volume of output by which aggregate costs increases if the volume of output is increased or decreased by one unit.Estimated Cost - Kohler defines estimated cost as "the expected cost of manufacture, or acquisition, often in terms of a unit of product computed on the basis of information available in advance of actual production or purchase”. Estimated costs are prospective costs since they refer to prediction of costs.Differential Cost - (Incremental and decremental costs). It represents the change (increase or decrease) in total cost (variable as well as fixed) due to change in activity level, technology, process or method of production, etc. For example, if any change is proposed in the existing level or in the existing method of production, the increase or decrease in total cost or in specific elements of cost as a result of this decision will be known as incremental cost or decremental cost.Imputed Costs - These costs are notional costs which do not involve any cash outlay. Interest on capital, the payment for which is not actually made, is an example of imputed cost. These costs are similar to opportunity costs.Capitalized Costs - These are costs which are initially recorded as assets and subsequently treated as expenses. Example, installation expenses on the erection of a machine are added to the cost of a machine.Product Costs - These are the costs which are associated with the purchase and sale of goods (in the case of merchandise inventory). In the production scenario, such costs are associated with the acquisition and conversion of materials and all other manufacturing inputs into finished product for sale. Hence, under marginal costing, variable manufacturing costs and under absorption costing, total manufacturing costs (variable and fixed) constitute inventoriable or product costs.Opportunity Cost - This cost refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action. For example, a firm financing its expansion plan by withdrawing money from its bank deposits. In such a case the loss of interest on the bank deposit is the opportunity cost for carrying out the expansion plan.Out-of-pocket Cost - It is that portion of total cost, which involves cash outflow. This cost concept is a short-run concept and is used in decisions relating to fixation of selling price in recession, make or buy, etc. Out-of-pocket costs can be avoided or saved if a particular proposal under consideration is not accepted.Shut down Costs - Those costs, which continue to be, incurred even when a plant is temporarily shut-down e.g. rent, rates, depreciation, etc. These costs cannot be eliminated with the closure of the plant. In other words, all fixed costs, which cannot be avoided during the temporary closure of a plant, will be known as shut down costs.Sunk Costs - Historical costs incurred in the past are known as sunk costs. They play no role in decision making in the current period. For example, in the case of a decision relating to the replacement of a machine, the written down value of the existing machine is a sunk cost and therefore, not considered.Absolute Cost - These costs refer to the cost of any product, process or unit in its totality. When costs are presented in a statement form, various cost components may be shown in absolute amount or as a percentage of total cost or as per unit cost or all together. Here the costs depicted in absolute amount may be called absolute costs and are base costs on which further analysis and decisions are made.Discretionary Costs - Such costs are not tied to a clear cause and effect relationship between inputs and outputs. They usually arise from periodic decisions regarding the maximum outlay to be incurred. Examples include advertising, public relations, executive training etc.Period Costs - These are the costs, which are not assigned to the products but are charged as expenses against the revenue of the period in which they are incurred. All non-manufacturing costs such as general & administrative expenses, selling and distribution expenses are recognised as period costs.Engineered Costs - These are costs that result specifically from a clear cause and effect relationship between inputs and outputs. The relationship is usually personally observable. Examples of inputs are direct material costs, direct labour costs etc. Examples of output are cars, computers etc.Explicit Costs - These costs are also known as out-of-pocket costs and refer to costs involving immediate payment of cash. salaries, wages, postage and telegram, printing and stationery, interest on loan etc. are some examples of explicit costs involving immediate cash payment.Implicit Costs - These costs do not involve any immediate cash payment. They are not recorded in the books of account. They are also known as economic costs. (b) Cost Driver Cost Pool Cost Driver Quality Control Number of InspectionsProduct Units Produced Research and Development Number of research projectsPersonnel hours on a project Machine Maintenance Machine Hours Employee Training Costs Number of Training HoursEmployees Trained Customer Service Number of service callsNumber of products servicedHours spent on servicing products (c) Limitations of Budgetary Control System Points Description 1. Based on Estimates Budgets are based on a series of estimates, which are based on the conditions prevalent or expected at the time budget is established. It requires revision in plan if conditions change. 2. Time factor Budgets cannot be executed automatically. Some preliminary steps are required to be accomplished before budgets are implemented. It requires proper attention and time of management. Management must not expect too much during the initial development period. 3. Co-operation Required Staff co-operation is usually not available during the initial budgetary control exercise. In a decentralised organisation, each unit has its own objective and these units enjoy some degree of discretion. In this type of organisation structure, coordination among different units is required. The success of the budgetary control depends upon willing co-operation and teamwork. 4. Expensive The implementation of budget is somewhat expensive. For successful implementation of the budgetary control, proper organisation structure with responsibility is prerequisite. Budgeting process start from the collection of information to for preparing the budget and performance analysis. It consumes valuable resources (in terms of qualified manpower, equipment, etc.) for this purpose; hence, it is an expensive process. 5. Not a substitute for management Budget is only a managerial tool and must be intelligently applied for management to get benefited. Budgets are not a substitute for good management. 6. Rigid document Budgets are sometime considered as rigid documents. But in reality, an organisation is exposed to various uncertain internal and external factors. Budget should be flexible enough to incorporate ongoing developments in the internal and external factors affecting the very purpose of the budget. (d) Cost Control Cost Control Cost Reduction 1. Cost control aims at maintaining the costs in accordance with the established standards. 1. Cost reduction is concerned with reducing costs. It challenges all standards and endeavours to improvise them continuously 2. Cost control seeks to attain lowest possible cost under existing conditions. 2. Cost reduction recognises no condition as permanent, since a change will result in lower cost. 3. Cost control is a preventive function. 3. Cost reduction is a corrective function. It operates even when an efficient cost control system exists. 4. Cost control ends when targets are achieved. 4. Cost reduction has no visible end and is a continuous process.