Urgent expenses are those that must be incurred in order for the business to continue operating - for example, the costs of supplies and labour that must be expended if manufacturing is to take place.
Postponable expenses are those that can be deferred for at least a period of time, such as building and machinery upkeep. This difference is commonly used by railways. They are aware that rolling stock and permanent track repair might be postponed for a period of time.
1. Out-of-Pocket and Book Costs:
Out-of-pocket expenses are those that require immediate financial payments to third parties. Book expenses, like depreciation, on the other hand, do not demand immediate cash payments. Selling assets and putting them on hire can turn book expenses into out-of-pocket costs. Depreciation and interest would be replaced by rent. When it comes to expansion, book expenses aren’t considered until the assets are acquired.
2. Escapable and Unavoidable Costs:
Costs that can be lowered as a result of a business’s operations contracting are known as escapable costs. It is the overall effect on costs that matters, not only the expenses that may be avoided directly as a result of the shrinkage. Unavoidable expenditures, such as labour, electricity, and other utilities, are required to run the business.
Controllable and discretionary expenses are not the same as escapable costs. The latter is similar to cutting off excess fat and is not linked to a specific restriction choice.
3. Replacement and Historical Costs:
Historical cost refers to the cost of a plant at the time it was purchased. The sum that would have to be paid today to acquire the identical facility is referred to as replacement cost. For example, if a machine costs Rs.15,000 at the time of purchase in 2010 and now costs Rs.85,000, the historical cost of Rs.15,000 is the historical cost and the replacement cost of Rs.85,000 is the replacement cost.
4. Controllable and Non-Controllable Costs:
The notion of responsibility accounting leads to cost being classified as controllable. The controllability of a cost is determined by the levels of responsibility involved. A controllable expense is one that is reasonably amenable to regulation by the executive whose duty it is to identify that cost. As a result, a cost that is uncontrolled at one level of responsibility may be considered controllable at a higher level.
Direct labour and material expenses are typically within control. Some overhead expenditures are manageable, while others are not. Indirect labor, supplies, and electricity are usually controllable. An allocated cost is not controllable.