Learn the Ways How Cost Concepts Relating to Income Measurement Works

By Michelle Johnson
12 Sep, 2017

Cost Concepts Relating to Income Measurement Homework Answers

Cost refers to the amount spent by an organization in order to provide the goods and services to the customers. It is the monetary equivalent that goes out of an organization to produce the goods and services.The financial efficiency of any firm is determined by its capability to minimize cost and maximize efficiency. An understanding of various costs concepts helps in effectively running a business.The students can always approach to a multitude of assignment helps available for cost concepts relating to income measurement homework answers.
Classification of costs:
Costs can be classified into various sections, depending upon their functions, such as:

  1. Management function:

Further classified into manufacturing (costs incurred in procurement of raw materials and labor costs) and non-manufacturing (costs not incurred in manufacturing such as advertising, distribution, commission) costs.

  1. Simplicity of trace ability:

Further classified as direct (directly involved in production of goods and services such as raw material and labor costs) and indirect (indirectly involved in production of goods and services such as taxes, rent, transportation, facility, etc.) costs.

  1. Judgment of charge against returns:

Further classified as product (includes costs in inventory and storage) and period (includes non-inventorial costs such as selling and administrative) costs.

  1. Performance in accordance with movement:

Further classified as fixed (includes the minimum cost incurred in manufacture such as rent, insurance, and depreciation), variable (includes the alternating costs such as incentives and economies of scale), and mixed (includes costs that are fixed up to a certain limit and then vary as per usage such as electricity expenses) costs.

  1. Applicability to decision making:

Further classified as relevant (that differ as per decision making such as exit cost or an alternative course of action), standard (predetermined costs as per historical experiences), opportunity (includes benefit foregone with an alternative course of action), sunk (costs that do not differ in a managerial decision making), and controllable (includes the expenses that can be influenced by managerial decisions) costs.
Income measurement refers to the amount of money left with an organization post taking care of all its expenses. In other words, it could be termed as the calculation of profit or loss. Income measurement gets complicated in terms of assets that depreciate over time or with time value of money.
Approaches to income measurements:

  1. Transaction Approach:

This is a conventional approach to income measurement. It depicts the differences between assets and liabilities that arise as a result of transaction. The transactions relate to the revenues earned by the sale versus the costs incurred in the production of the goods and services. The primary benefit of this approach is that the profit accrued by each sale could be calculated individually.

  1. Activities Approach:

It differentiates from the previous approach in the sense that it represents the activities of a firm instead of only the transactions. It works on the principle that income is accrued when certain activities are undertaken rather than transactions. Though this approach fails to indicate the actual measurement of income; it, however, allows the calculation of several additional ideas of income.

  1. Balance Sheet Approach:

It believes that assets are increased owing to increased income, as they share a directly proportional relation. Hence, income measurement is calculated by the measurement of assets for a specific period. It calculates income based on the difference of assets for a particular interval.This approach is somewhat flawed as the consideration of both fixed and current assets need to be analyzed, and depreciation also needs to be considered.

  1. Value Added Approach:

Income, under this approach, is measured with the help of the value added by the firm during a particular period. Value is calculated by the amount of difference between the cost of output and the cost of materials incurred. Simply put, this calculates the income based on the amount of money incurred in transforming the raw material into finished goods.
With the above comprehensive explanations of cost concepts,approaches and income measurements approach, one can easily make out the intricacies one would be facing while correlating the two approaches. It becomes tedious for the higher management to work on this correlation of the two approaches in order to quantify the monetary organizational goals. When it comes to students, the cost concepts relating to income measurement homework answers pose even bigger dread.
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