(a) A manufacturing firm is planning to introduce a new product while simultaneously considering changes in its production methods, advertising…

(a) Following cost would influence managerial decisions: 1. 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. 2. 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. 3. 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. 4. 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. 5. 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. 6. 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. 7. 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) Difference between Scrap and Defectives Scrap Defectives 1. It is the loss connected with the output 1. This type of loss is connected with the output as well as the input. 2. Scraps are not intended but cannot be eliminated due to the nature of material or process itself. 2. Defectives also are not intended but can be eliminated through a proper control system. 3. Generally, scraps are not used or rectified. 3. Defectives can be used after rectification. 4. Scraps have insignificant recoverable value. 4. Defectives are sold at a lower value from that of the good one. Treatment of Scrap Normal- The cost of scrap is borne by good units and income arises on account of realisable value is deducted from the cost. Abnormal- The scrap account should be charged with full cost. The credit is given to the job or process concerned. The profit or loss in the scrap account, on realisation, will be transferred to the Costing Profit and Loss Account. Treatment of Defectives: Normal- An amount equal to the cost less realisable value on sale of defectives are charged to material cost of good production. Abnormal- Material cost of abnormal defectives are not included in material cost but treated as loss after giving credit to the realisable value of such defectives. The material cost of abnormal loss is transferred to costing profit and loss account.