The cost of goods or services means the amount spent on production of the same product or service. The meaning of cost depends on the circumstances of different persons. For example, the producer of the goods, the trader who is engaged in purchasing and selling of the manufactured goods and the consumers of the goods have the different criteria of the cost.

The meaning of the cost for producer is the cost of material plus or direct or indirect expenses incurred on the goods to make them for selling purpose.

The meaning of the cost for the trader is the purchase value of the goods which he pays to the producer of the goods plus other expenses incurred by him before he resells the goods. It means he has to pay the cost of goods plus the profit charged by the producer and the expenses incurred by him like cartage expenses, storing of goods expenses and other direct or indirect expenses.

The meaning of the cost from the point of view of consumer is, the total value paid by him to purchase the goods or services plus other expenses like cartage or delivery expenses etc. It includes the profit part of producer or trader or both.

Illustration:-

M/s ABC Enterprises, a producer purchased the raw material for Rs.100000/=. They spent Rs.20000/= as direct expenses and RS.5000/= as indirect to manufacture the same for selling purpose. They sold the goods to a trader M/s XYZ Ltd., for Rs.150000/=. M/s XYZ Ltd. again spent Rs.5000/= as direct and indirect expenses for further sale. The sold this material to a consumer for Rs.200000/= and consumer paid cartage for Rs.1000/=.  Calculate the cost from the point of view of various above mentioned persons.

Solution:-

Cost of Goods for the Producer i.e. M/s ABC Enterprises:-

Cost of Raw Material                                         Rs.100000/=

Expenses incurred by them (Direct & Indirect)   Rs.20000/=

Total Cost of Product                                        Rs. 120000/=

Cost of Goods for the trader i.e. M/s XYZ Limited:-

Purchase cost or product                                  Rs.150000/=

Expenses incurred by them (Direct or Indirect) Rs.5000/=

Total cost of product                                        Rs.155000/=

Cost of Goods for the Consumer:-

Purchase value of the product                         Rs.200000/=

Cartage paid                                                   Rs.1000/=

Total Cost of product                                      Rs.201000/=

From above example we can understand that the cost of product is increased by the profit margin by each seller. Therefore, the cost of product by all type of purchasers, will be increased by margin of profit and the expenses incurred by the concerned purchaser.

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