Definition of Cost

This time we will discuss the meaning of costs and classifications, concepts and examples of costs so that we can find out the meaning of cost accounting that is often heard.

Table of contents :

• Definition of Cost
• Cost Behavior
• Types of Costs Based on Decision Making Objectives
• Behavioral-Based Fee Types
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Definition of Cost

Costs are sacrifices or expenses made by a company or individual that aims to get more benefits from the activities carried out (Raharjaputra, 2009).

In terms of costs, sometimes it is quite a hassle to distinguish between costs and expenses. To distinguish it is described as follows.

Costs are costs in terms of costs / expenses incurred by a company or individual which is directly related to the output / product produced by the company / individual.

For example: raw and auxiliary materials, direct labor costs, and general factory costs (foreman / factory supervisor, factory GM, fuel, factory supplies, factory electricity, and others). In the structure of the company’s loss / profit statement it is usually called the cost of goods manufactured.

Expenses are expenses incurred by companies or individuals that are only supporting activities,

for example: general and administrative costs, and marketing / sales costs, such as head office employee salaries, head office telephone / water / gas / air conditioning costs, sales and marketing costs, and others.

understanding of cost

There are several classifications regarding costs. understanding and examples of cost classification:

1. Fixed costs are costs whose total amount remains within the range of changes in the volume of a particular activity. The size of the fixed costs is influenced by the long-term condition of the company, technology and management methods and strategies. Examples: land and building taxes, employee salaries and insurance.
2. Variable costs are costs whose total amount changes in proportion to changes in the volume of activity. Variable cost per unit is constant (fixed) with changes in volume of activity. Example: raw material costs, advertising costs and commissions for a selesman according to their level.
3. Direct cost (direct cost) is the cost that occurs where the only cause is because there is something that must be financed. Example: raw material costs, labor costs and lawyers.
4. Indirect cost (indirect cost) is a cost that occurs not only due to something being financed, in relation to the product, indirect costs are known as factory overhead costs. Example: building insurance costs paid by the company and motorbike rental fees.
5. Operation cost is the costs incurred to operate a system or run a system. Example: operator salary costs.
6. Maintenance cost (maintenance cost) is the cost incurred to maintain the system in its operating period. Example: maintenance costs for equipment and factory facilities.
7. First or Investment cost (investment cost) is the initial cost before an operational activity is carried out. Example: the cost of investing in land, materials and machinery in company operations.
8. Incremental cost is the cost arising from an increase or decrease in output (usually the result of production / operation activities). Incremental cost is also a cost that occurs as a result of a decision. Incremental cost is measured from the change in IC due to a decision. Therefore it can be variable, it can also be fixed. Example: increase in total production costs due to management decisions to add labor and raw materials.
9. Marginal cost is the increase in costs that the company must incur as a result of an increase in one output. The difference with incremental cost lies in the aspects that change the total cost. If in incremental cost changes in total costs are influenced by changes in decisions, at marginal costs changes in total costs are affected by the addition of one unit of product or the next. For example: a company must increase its production cost budget due to additional requests from previous orderers.
10. Unit cost is the cost per unit of product. Mathematically, unit cost is defined as the value of the division between the total cost required and the number of product units (goods or services) produced. For example, a company can find out information about the cost price per unit piece of a product produced by calculating the unit cost.
11. Total cost (total cost) is the total cost of production used to produce a certain number of outputs, both fixed and variable. Example: the company calculates the total production costs incurred.
12. Recurring cost is a cost of the same amount that must be paid again in the presence of an additional activity that produces the same product (output). Every additional 1 unit of output, the costs incurred recurrently or increase by the cost per unit. For example, whether a photocopier is used or not, the company will pay a copy machine rental fee of Rp. 1 million per month.
13. Unrecurring costs are costs that only appear once. That is, nothing is added after this expense is incurred. For example, the costs incurred to buy land.
14. Sunk costs are costs that have already been paid out, and are no longer relevant in calculating costs and benefits. The logic of this definition of costs is that everything that is considered an alternative decision made to overlay existing expenses, these expenses will remain (out). For example, I am interested in buying a sports motorbike for Rp. 200 million. I paid a down payment of 2 million to the seller. One time, I was interested in buying a low rider motorbike. I had to pay Rp.56 million in full to get the motorbike. The choice of the two options, whether I buy a sports motorbike or buy a low-rider motorbike, will not affect the Rp. 2 million mark.
15. Past cost has the same meaning as Sunk cost where the value cannot be avoided and cannot be changed through any decision, no matter what action is taken.

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Cost Behavior

Hansen and Mowen (2006) state that cost behavior is a general term that describes changes in costs when the level of output changes. Costs that do not change when output changes are fixed costs.

Variable costs on the other hand are an increase in total costs when there is an increase in output activity and a decrease in total costs when there is a decrease in output activity.

Types of Costs Based on Decision Making Objectives

Based on the objectives of management decision making, costs can be grouped into (Supriyono, 2011):

1. Relevant Cost (Relevant cost)
   Relevant cost is the cost that occurs in a certain alternative action, but does not occur in other alternative actions. Relevant costs will influence decision making, therefore relevant costs must be considered in making decisions.
2. Irrelevant cost (irrelevant cost)
   Irrelevant costs are costs that do not differ between the existing alternative actions. Irrelevant cost does not affect decision making and will remain the same regardless of the alternative chosen. Therefore irrelevant costs should not be considered in making decisions.

According to Mulyadi (2002: 8): “Costs are sacrifices of economic resources, which are measured in units of money, which have occurred or are likely to occur to achieve certain goals.” From this definition, there are four main elements in costs, namely:

1. Cost is a sacrifice of economic resources.
2. Measured in units of money.
3. What has happened or is likely to happen.
4. The sacrifice is to get the benefits now and / or in the future.

Thus, cost is the sacrifice of an economic resource, measured in units of money, to obtain goods or services that are expected to provide current or future benefits.

The tradeoffs of economic resources can be historical costs and future costs. Meanwhile, in a narrow sense, cost can be interpreted as a sacrifice of economic resources to obtain assets or indirectly to obtain income, which is called the cost of goods.

Mulyadi (2002: 14-17) classifies costs into five ways of classifying costs to meet various objectives, namely:

1. Classification of costs based on the object of expenditure.
2. Classification of costs on the basis of main functions in the company.
3. Classification of costs is based on the cost relationship with something that is financed.
4. Cost classification accordingly. cost behavior in relation to changes in the volume of activity.
5. Classification of costs on the basis of their useful life

Classification of costs according to expenditure objects based on the name of this expenditure object is suitable for use in organizations that are still small.

Usually this classification is useful for planning the company as a whole and in general for the purposes of presenting external reports.

Also Read: By-   Product Definition

Classification of costs according to the main function in the company means that costs are classified based on the functions in which these costs occur or are related.

The main functions in a manufacturing company are functions: production, administration and general and marketing functions.

Therefore the costs in a manufacturing company can be classified into production costs, general and administrative costs and marketing costs.

Production costs are costs that occur in relation to the processing of raw materials into finished products. Production costs are divided into 3 elements: raw material costs, labor costs, factory overhead costs. Raw material costs and labor costs are also known as prime costs, while labor costs and factory overhead costs are also called conversion costs.

It can be explained that what is meant by raw material costs are costs that form a comprehensive part of the finished product and raw material costs are the cost of raw materials processed in the production process.

Meanwhile, direct labor costs are labor whose services can be calculated directly in the manufacture of certain products. Direct labor costs are labor costs that can be identified directly for a particular product.

Factory overhead costs are all production costs, apart from raw material costs and direct labor costs. These costs can be in the form of costs for supporting materials, indirect labor costs and other indirect production costs.

Administrative and general costs in this case are intended as costs that occur in connection with activities that are not identified with production or marketing activities.

Administrative and general costs are costs incurred in relation to the preparation of policies and direction of the company as a whole.

Examples of general and administrative expenses are board of directors’ salaries, fees for contributions, executive salaries, telephone fees and so on.

There are two types of treatment for general and administrative costs:

1. Administrative and general costs are allocated to two functions in marketing, namely the production function and the marketing function. This is done because basically administrative and general costs are incurred for these two functions.
2. Separate general and administrative costs as separate cost groups and do not allocate them to production and marketing functions. In practice, there is a tendency to classify administrative and general costs as separate cost groups, separate from production and marketing costs. It can be easier to control general and administrative costs if these costs are grouped and presented separately.

Marketing costs are costs incurred in connection with the business of obtaining orders and fulfilling orders.

So to get orders, the company incurs costs to attract buyers by holding sales promotions, advertisements and others.

Meanwhile, to fulfill orders, the company issues transportation costs, insurance costs and others so that the company’s products reach the customer. Marketing costs and general administration costs are also referred to as commercial costs.

Classification of costs is based on the cost relationship with something that is financed in relation to the product produced. If a company processes raw materials into finished products, then something that is financed is in the form of a product, whereas if the company produces services, something that is financed is in the form of the delivery of the service.

In relation to something that is financed, costs can be divided into two groups, namely direct costs and indirect costs. Direct costs are costs incurred, whose only cause is because of something being financed.

If something is not being financed then direct costs will not occur. Direct production costs consist of raw material costs and direct labor costs. Indirect costs are costs that are incurred not only due to something being financed.

The difference between direct costs and indirect costs in relation to products is necessary if the company produces more than one type of product and management wants to determine the cost of each product type.

If a company produces only one type of product (such as a cement company, a sugar company), all types of production costs are direct costs, so that the company does not require any indirect costs related to the product.

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The classification of costs according to their behavior is the distribution of costs consisting of variable costs, semi-variable costs and fixed costs.

The definition of variable costs is the cost whose total amount changes in proportion to changes in the volume of activity. Meanwhile, semi-variable costs are the total costs that remain within the range of the volume of a particular activity,

and fixed costs are costs that do not change or are not determined by the volume of production in a certain period.

Classification of costs on the basis of their useful life relates to financial reporting.

For example, the calculation of the profit or loss of a company is done by matching the income earned in a certain accounting period with the costs incurred in the same period.

In order for the calculation of profit or loss and the determination of the cost of the product to be carried out accurately, costs can be classified in relation to charges into a particular accounting period.

On the basis of time, costs can be divided into two groups, namely: 1) capital expenditure and 2) revenue expenditure.

Capital expenditures are expenses enjoyed by more than one accounting period.

Capital expenditures are not fully expensed in the accounting period in which they are incurred, but are distributed to periods that enjoy the benefits of the expenditure.

Meanwhile, income expenditures are expenses that are only useful in the accounting period in which they occur.

Examples of income expenses are machine maintenance costs, telephone costs, sales commission fees.

Cost classification is in practice reflected in the company’s income statement. How companies classify costs in an income statement, depending on the purpose of the report itself or to whom it is addressed.

If addressed to external parties, there are general provisions that may be specifically regulated according to certain Financial Accounting Standards.

However, if the report is directed to management, there is no obligation to comply with these standards, but is based on the principle: “Diffrentn costs for different porposes”.

In general, the structure of the service company income statement contains three main components, namely overhead costs, marketing costs and administrative costs and general, including hotel companies.

Behavioral-Based Fee Types

For the purposes of planning and controlling costs and making decisions, costs can be classified according to their behavior in relation to changes in the volume of activities which are grouped into three types, namely:

1. Fixed Costs (Fixed Cost) Fixed
   costs are costs whose total amount remains constant, not affected by changes in the volume of activities or activities up to a certain level. Fixed costs per unit are inversely proportional to changes in volume of activity or capacity. The higher the activity level, the lower the fixed cost per unit. The lower the activity level, the higher the fixed cost per unit.
2. Variable cost (Variable cost) Variable cost
   (Variable cost) is a cost that the total amount changes proportionally (proportionally) with changes in the volume of activities. The higher the activity or activity volume, the higher the total variable cost proportionally. The lower the activity volume, the lower the total variable costs proportionally.
3. Semivariable costs (Semivariable cost / Mixed Cost) Semivariable costs
   are costs that have elements of fixed costs and variable costs in them. The fixed cost element is the minimum cost to provide services, while the variable cost element is part of the semivariable cost which is influenced by the volume of activities. Semivariable costs whose total amount changes with changes in the volume of activity, but the rate of change is not proportional or proportional. The higher the volume of activities, the higher the total semivariable costs. The lower the volume of activities the lower the total semivariable costs, but the changes are not proportional to changes in the volume of activities. Examples of semivariable costs are electricity costs, telephone charges and water charges.