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CMA Foundation · Fundamentals of Financial and Cost Accounting · Cost, Cost Centre, Cost Unit and Cost Drivers

A firm's cost accounting system records that a machine's depreciation of Rs 30,000 is charged to a product costing Rs 2,00,000 in materials. Which feature of 'cost' in cost accounting is mainly illustrated by attaching the depreciation to the product?

Cost includes expenditure attributable to a product or activity, whether or not cash is paid at that time. Depreciation on production machinery is a non-cash item, yet it is a genuine cost of using the asset and is therefore included in product cost.

  1. ACost is measured only when cash is paid
  2. BCost of a product includes the expenditure attributable to it, even non-cash itemsCorrect
  3. CDepreciation is excluded from cost as it is a notional item
  4. DCost is the same as the selling price less profit margin

Explanation

Cost means expenditure incurred or attributable to a product or activity. Depreciation is non-cash but is attributable to production, so it is included in product cost. Cash payment is not a requirement.

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