What are the various concepts of Cost?

These are the following concepts used in cost accounting:

Cost: The term cost means anything which is sacrificed to obtain something. It may be actual or notional incurred or attributable to a given thing or to ascertain cost of a given thing. When we sacrifice something to obtain anything it is called cost. When we only sacrifice but does not get anything it may be called charity or donation but not cost.

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Cost is a generic term. it is always advisable to qualify the word cost to show exactly what it means e.g. prime cost, factory cost, cost of production etc. Cost is also different from value as cost is measured in terms of money whereas value is measured in terms of usefulness or utility of an article.


A cost must always be studied with reference to its purpose and conditions. Different costs may be ascertained for different purposes and under different conditions. For the valuation of work-in-progress, factory cost is used but for valuation of finished goods, cost of production is used.

Cost Unit: It is a device for the purpose of breaking up or separating cost into smaller sub-divisions attributable to products and services. It is the unit of product, service or time in relation to which costs may be ascertained, e.g., tone in case of coal. It must be clearly defined and selected before the process of cost finding can be started. It must not be too big or too small and must be so selected that expenditure can be associated with it and is appropriate to the needs of the business. For instance, in case of brick kiln, the unit should not be each brick but 1000 bricks; normally, it is the same unit by which wholesale transactions are entered into.

Cost Centre: Cost centres are the smallest segments of activity or area of responsibility for which costs are accumulated or ascertained. It may be a location, person or item of equipment for which costs may be ascertained or controlled, generally cost centres are the departments, but a department may also contain several cost centres. For example an assembled department may be supervised by a foreman. It contains several assembly lines, each assembly lines is treated as cost centres which are headed by assistant foreman.

The determination of suitable cost centre is very important for cost ascertainment and control. The manager in charge of the cost centre is responsible for control of cost of his cost centre. Cost centres have been divided in to two categories (i) product Centre, (ii) Service Centre.


Profit Centre: A profit centre is that segment of activity of a business which is responsible for both revenue and expenses and discloses the profit of a particular segment of activity. profit centres are created to delegate responsibility to individuals and measure their performance.

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