Specific Cost Systems

Having discussed the basic methods and techniques of cost, let us look into the other specific types of cost systems developed on the principle of different cost for different purposes. As the word “cost” can rarely stand alone, every prefix or suffix changes its connotation. Some of the frequently used terms not explained earlier are briefly mentioned as follows

• Opportunity cost: It is the value of a benefit sacrificed in favour of an alternative course of action. It is the measurable advantage foregone as a result of the rejection of best alternative uses of resources, whether of materials, labour or facilities. This cost does not involve any cash outlay and is computed only for the purpose of comparison in the context of managerial decisions. The concept recognises that resources are scarce and have alternative uses.
• Imputed or Notional cost: It is a hypothetical cost taken into account in a particular situation to represent a benefit enjoyed by an entity in respect of which no actual expense is incurred. For example, interest on own capital, rent on own premises, etc. are not included in financial accounts, but for determining comparative cost may be included in costs.
• Out of Pocket cost: It is just the opposite of imputed cost. This is that portion of cost which represents actual cash outlay. Out-of-pocket cost is very much relevant in price fixation during trade depression or when a make or buy decision is to be made.
• Sunk cost: It represents historical costs, incurred in the past and is irrevocable in a given situation. Hence, a sunk cost is not relevant to current decision making. Generally the book value of an asset is treated as sunk cost, while considering the replacement of the asset.
• Relevant cost: Costs that are affected by decisions are relevant costs. These are expected future costs that will differ between alternatives. Future variable costs generally become relevant for decision making, while fixed costs may be irrelevant, if they do not change in total. In the same way if an item of future cost remains same for two or more alternatives, it becomes irrelevant for the decision making.
• Replacement cost: It is the current market cost of replacing an asset or a material.
• Policy cost: Costs incurred as a result of particular policy decision are policy costs.  For example, ownership of assets will create a charge for depreciation. Hiring a new office will create a charge for rent. Such depreciation and rent will be policy costs.  Policy costs are fixed or period costs.
• Discretionary cost: Discretionary costs are those which arise from yearly budget appropriation and reflect management policy, having no direct input output relationship between their costs and activity volume. Examples are training expenses, advertisement, Employee welfare expense. This is also termed as managed or programmed cost.