Exam Question # Q.4. What are the types of Postponable Costs:

Exam Question # Q.4. What are the types of Postponable Costs:

Ans. Those costs which must be incurred in order to continue operations of the firm are urgent costs – for example, the costs of materials and labor which must be incurred if production is to take place.

Costs which can be postponed at least for some time are known as postponable costs, e.g., maintenance relating to building and machinery. Railways usually make use of this distinction. They know that the maintenance of rolling stock and permanent way can be postponed for some time.

1. Out-of-Pocket and Book Costs:

Out-of-pocket costs refer to costs that involve current cash payments to outsiders. On the other hand, book costs, such as depreciation, do not require current cash payments.

Book costs can be converted into out-of-pocket costs by selling the assets and having them on hire. Rent would then replace depreciation and interest. While undertaking expansion, book costs do not come into the picture until the assets are purchased.

2. Escapable and Unavoidable Costs:

Escapable costs are costs that can be reduced due to a contraction in the activities of a business enterprise. It is the net effect on costs that is important, not just the costs directly avoidable by the contraction. Unavoidable costs, such as labor charges, power, etc., are necessary to run the organization.

Escapable costs are different from controllable and discretionary costs. The latter are like chopping off the additional fat and are not directly associated with a special curtailment decision.

3. Replacement and Historical Costs:

Historical cost means the cost of a plant at a price originally paid for it. Replacement cost means the price that would have to be paid currently for acquiring the same plant. For example, if the price of a machine at the time of purchase, say, in 2010 was Rs.15,000 and if the present price is Rs.85,000, the original cost of Rs.15,000 is the historical cost while Rs.85,000 is the replacement cost.

4. Controllable and Non-Controllable Costs:

The concept of responsibility accounting leads directly to the classification of cost as controllable. The controllability of a cost depends upon the levels of responsibility under consideration. A controllable cost may be defined as one which is reasonably subject to regulation by the executive with whose responsibility that cost is being identified. Thus, a cost which is uncontrollable at one level of responsibility may be regarded as controllable at some other, usually higher level.

Direct material and direct labor costs are usually controllable. As regards overheads, some costs are controllable and others are not. Indirect labor, supplies, and electricity are usually controllable. An allocated cost is not controllable.