Cost Segregation 2-marks
Concept of Cost.
Cost represents the resources that have been sacrificed in form of material, labor and other direct and
indirect expenses for a particular purpose. In other words, it is the amount of products or services. The
resources given up are generally in terms of money or if not in terms of money. They are always
expressed in monetary terms. The term 'cost ‘itself has no significant meaning, therefore, it is always
used with an adjective or phrase that conveys the meaning intended, such as prime, direct, indirect,
fixed, variable ,controllable, opportunity, differential, marginal replacement etc.
■ Write in brief about the importance of cost.
- The cost helps in the following activities:
1. Preparation of business plan.
2. Achievement of business goal.
3. Helps to cope with competition.
4. Fixing of selling price.
5. Evaluation of performance.
■ What is meant by variable cost? Write any three features of it.
The cost that changes proportionately with the change in output is known as variable cost. An increase
in the volume means a proportionate increase in the total variable costs and decrease in volume will
lead to a proportionate decline in the total variable costs. Its features are as follows:
1. Per unit variable costs remain constant.
2. Total amount of variable cost changes according to changes in level of production.
3. Variable cost is a controllable cost.
■ What do you mean by fixed cost? Mention its three features.
- The costs, whose total amount remains constant, up to a certain capacity is called fixed cost. The level
of production changes, but total amount of fixed cost remains constant. Its features are as follows:
1. Per unit fixed cost changes in opposite direction
Of production activity.
2. Fixed cost cannot be controlled in a short-term period and by the lower level responsibility.
3. Total fixed cost remains the same up-to ascertain capacity level.
■ What is semi-variable cost? Mention its features.
The costs which are neither perfectly variable nor absolutely fixed in relation to changes in volume, are
called semi-variable or semi-fixed costs. Neither total amount nor per unit cost of semi-variable cost
remains constant. If the levels of production increase than total amount of semi-variable cost also
increases and per unit cost decreases but not proportionately. These costs have the characteristics of
both fixed and variable costs. Electricity charges, telephone charges, water supply charge are the
examples of semi-variable costs. They are also called mixed costs, combined costs or semi-fixed costs. Its
features are as follows:
1. Neither total amount nor per unit cost remain constant.
2. It can never be zero.
3. When the level of production increases then its total also increases but per unit semi-variable cost
decreases and vice-versa.
■ Why semi-variable cost needs to be segregated into variable and fixed cost for managerial
decisions?
- The reasons for the segregation of the semi-variable cost are mentioned below:
1. Segregation helps to calculate the selling price of the extra output.
2. It also helps to control the variable cost. The semi-variable cost should be segregated to variable and
fixed component since the fixed cost cannot be controlled.
3. It aids the management in decision making. Since most of the managerial decisions are based on
marginal costing, it is necessary to separate the semi-variable costs into fixed and variable parts.
