Cost concepts for planning and control

Cost concepts for planning and control

In financial accounting, the emphasis is on historical costs while the focus in management planning and control is on future or estimated costs. Realistic and attainable standard for various elements of costs are developed for estimating costs. These estimated or standard costs are incorporated into the operating plans (budgets) of the business enterprises. While estimating costs, an important factor to be considered is the behaviour of costs with the level of activity or volume.

Some costs have the tendency of varying with activity while others are non-variable. The variability of costs certainly has a significant bearing on the plans of the firm. Further, future or estimated costs are used as bench-marks to evaluate and control performances of executives and their subordinates. The planning and control activities of the firm also include choosing among alternatives. In making the choices, all relevant costs should be considered. The concepts of differential and marginal costs are important in such situations.

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