Explain the Meaning of Terms. 1. Cost allocation , Cost absorption & cost apportionment 2. Differential Cost, 3. Imputed cost, 4. Capitalized cost, 5. Product cost & period cost

 

1. Cost allocation , Cost absorption & cost apportionment      

a)     Cost allocation is defined as the process of allotment or identification of whole items to cost centre or unit.

b)     Cost absorption is process of absorbing all indirect costs allocated or apportioned over particular cost centre.

c)      Apportionment of cost is the process of charging the proportion of common items of cost to two or more cost centres on some equitable basis

E.g.: factory rent incurred for factory as a whole and apportioned to all the departments on the basis of floor area occupied

2.       Differential Cost:

a)     It is defined as the chanqe in total cost due to various factors.

b)     Differential cost calculations include both variable and fixed costs which are affected by the alternative courses of action.

3.       Imputed cost:     

a)     Imputed costs are hypothetical or notional costs, not involving in cash outlay computed only for purpose of decision making

b)     Eg: notional rent in respect of own building, interest on owned capital etc.

4.       Capitalized cost: Those cost which are initiallv recorded as assets and subsequently treated as expense are capitalized costs.

5.       Product cost & period cost:

a)     Product costs are those costs which are assiqned to the product.

b)     It is included in the inventorv valuation.

Eg: direct material cost, direct wages cost, etc.

c)      Period costs are those which cannot be assiqned to the particular product.

d)     These are charged against revenue.

Eg: administrative expenses, selling & distribution expenses, etc.