clasification of cost

7/27/2019 clasification of Cost

1/47

Cost Accounting


2/47

Cost

Cost is the measurement, in monetary terms, of the amount

of the resources used for the purpose of production of goods

or rendering services.


3/47

3 important factors

Identification of cost centers

Cost unit

Classifying the cost.


4/47

Cost Center

Any unit of cost accounting selected with a view to accumulating

all cost under that unit.

The unit can be product, a service, a department, a division, a

group of plant and machinery, a group of employees.


5/47

Types of Cost Center

May be of two types personal and impersonal cost centers.

Personal cost center consists of person or a group of persons .

Cost centers which are not personal cost centers are Impersonal

cost centers.


6/47

Types of Cost Center

May be further classified as Production cost centers and service

cost centers .

Production cost center are those which are engaged in production

like machine shop, welding shop, assembling shop etc.

Service cost centers are for rendering services to the production

cost centers like power house, maintenance, stores purchase office.


7/47

Industry Cost unit Industry Cost unit

Power MW Steam production Cubic Meter

Cement/steel MT Textile KM

Automobile Number Transport Tonne km/

passenger km

Cost Unit

Cost unit is a form of measurement of volume of production or service.

The unit is generally adopted on the basis of convenience and practice in the

industry concerned.


8/47

Classification of cost


9/47

Basis of classification

Nature of expense.

Relation of cost center traceability.

Functions / activities.

Behaviour wise.

Management decision making.

Production process.

Time period


10/47

Classification by Nature of expense

COST

Material Labour Expenses


11/47

Classification by Nature of expense (Contd.)

Material cost includes cost of procurement.

Freight inward, taxes & duties, insurances etc directly attributable to the

acquisition should be included.

Similarly trade discount, rebates, duty drawback, sales tax refund should be

deducted in determining the cost of material.


12/47


Labour cost means the payment made to the employees, permanent or

temporary, for their services

Salaries + wages (both permanent & temporary) + payment to the employees

of contractors.

Include fringe benefit like gratuity, ESI, overtime, bonus, incentive, leave

encashment etc.


13/47


Expenses are other than material cost or labour cost which are involved inan activity.

Expenditure on account of utilizes, payment for bought out services, job

processing charges etc. can be termed as expenses.


14/47

Classification by Relation of cost center

If an expenditure an be allocated to a cost center or cost object in an

economically feasible way then it is called direct or otherwise the cost

component is called indirect.

According to this classification material, labour and expenses are divided in

to direct/ indirect material, direct/ indirect labour & direct/indirect

expenses.

All direct costs are called prime cost and indirect costs are known as

overheads


15/47

Classification by Relation of cost center (Contd.)

cost

MATERIAL LABOUR EXPENSES

DIRECT

INDIRECT

DIRECT

INDIRECT

DIRECT

INDIRECT

PRIME

COST

OVERHEADS


16/47


Direct material cost is the cost of material which can be directly allocated

to a cost center or cost object in a economically feasible way.

Direct labour cost is the cost of wages of those workers who are readily

identified or linked with a cost center or cost object.

Direct expenses are those other than direct material or direct labour

which can be identified or linked to a cost center or cost object


17/47


Indirect material cost is the cost of material which can not be directly

allocated to a cost center or cost object.

Ex 1. consumable spares and parts

2. Lubricants for machinary

Indirect labour cost is the cost of wages of those workers who are not

directly allocated to a particular cost center or cost object.Ex 1. Salaries to staff in the administration and accounts department.

2. Salaries to the security staff.


18/47


Indirect expenses are the expenses other than of the nature of material or

labour which can not be directly allocated to a particular cost center.

EX insurance , taxes , duties etc.


19/47

Classification by Functions / Activities

Cost should be classified according to the major function for which

elements are used into the following four major functions :

1. Production;

2. Administration;

3. Research and Development;

4. Selling; and

5. Distribution


20/47

Classification by Functions / Activities (Contd.)

Production Cost is the cost of all items involved in the production of a

product or service.

It includes all the direct costs ( prime cost ) and all indirect costs involved

in the production ( Production Overhead ).

Production Cost = Prime cost ( direct material + direct labour + direct

expenses ) + Production overhead


21/47


Production overhead is also termed as Factory overhead or Manufacturing

overhead.

EX-

Salaries for production planning, technical supervision, factory administration etc.

Expenses for stores management

Security expenses for the factory

Labour welfare expenses

Dispensary and canteen expenses

Depreciation of plant and machinery , repairs and maintenance expenses

Insurance and quality control


22/47


Administration cost are expenses incurred for general management of an

organization. These are in the nature of indirect costs and are also termed

as Administration overhead.EX-

Salaries of administrative and accounts staff.

General Expenses like rent, lighting, rates and taxes, telephone, stationary etc.

Bank charges

Audit fees

Legal expense

Depreciation and repairs and maintenance of office building etc.


23/47


Selling cost are the indirect costs related to the selling of product or service

and include all indirect cost in sales management for the organisation.

EX-

Salaries, commission and travel expenditure of sales personal.

Advertisement cost.

Legal expenses for debt realisation

Market research costRoyalty on sale

After sale service cost


24/47


Distribution cost are the costs incurred in handling a product from the time

it is completed in the works until it reaches the ultimate customer.

EX-

Transport cost.

Cost of warehousing saleable products.

Cost of delivering the products to the customer.

Market research cost


25/47


Notes

1. Primary packing cost is included in the production cost whereas Secondary

packing cost is distribution cost

2.In case of heavy industries equipment supply, installation cost at the delivery site

for heavy equipments which involves assembling of parts, testing etc is included in

the production cost but not in the distribution cost.

3.Installation cost of Gas turbine at plant site is included in the cost of production of

Gas turbine.


26/47


Research and Development Costs are the cost for undertaking research to improvequality of a present product or improve process of manufacture, develop a new

product, market research etc. and commercialization thereof .

Research cost includes cost of development of new product and manufacturing

process; improvement of existing product or process.

Development cost includes the cost incurred for commercialization /

implementation of research findings.


27/47

Direct materials consumed

Direct labour cost

Direct expenses

Prime cost

Add: production overhead

Factory cost

Add: Adminstration overhead

Add: Research and development cost

Cost of Production

Add: Selling & Distribution Cost

Cost of Sales


28/47

Classification by Behaviour

Fixed

Variable

Semi variable


29/47

Classification by Behaviour (Contd.)

Fixed cost is the cost which does not vary with the changes in the productionvolume of activity in the short run.

These costs are not affected by temporary function in activity of an enterprise.

These are also known as period costs.

Ex - salaries, rent, audit fees, depriciation


30/47


Variable cost is the cost of elements which tends to directly vary with the volumeof activity .

Ex materials consumed, direct labour, sales commission, freight, packing etc.

variable cost has two parts (a) Variable direct costs; (b) Variable indirect costs.Variable indirect costs are termed as variable overheads.


31/47


Semi variable costs contain both fixed and variable elements.

They are partly affected by the fluctuation in the level of activity

Ex factory supervision, maintenance, power etc.


32/47


Characteristics of Fixed cost - (1) fixed amount within output of range (2) fixed cost

per unit decreases with increased output.

fixed cost6,00,000

5,00,000

4,00,000

3,00,000

2,00,000

1,00,000

0

fixed cost

0 10,000 20,000 30,000 40,000 50,000 60,000


33/47


Characteristics of Variable cost - (1) varies with production (2) Variable cost remains

constant per unit within range of activity.variable cost

6,00,000

5,00,000

4,00,000

3,00,000

2,00,000

1,00,000

0

variable cost

0 10,000 20,000 30,000 40,000 50,000 60,000


34/47


Total cost

12,00,000

10,00,000

8,00,000

6,00,000

4,00,000

2,00,000

0

fixed cost

variable cost

Total cost

0 10000 20000 30000 40000 50000 60000


35/47

Classification for management decision making

Marginal cost

Opportunity cost

Relevant cost

Sunk cost

Abnormal cost

Differential cost

Replacement cost

Imputed cost

Normal cost

Avoidable cost

Unavoidable cost


36/47

Classification for management decision making (contd.)

Marginal cost per unit is the change in the amount at any given volume of output

by which aggregate cost changes if the volume of output is increased or decreasedby one unit.

MARGINAL COST = PRIME COST + VARIABLE OVERHEADS

Differential cost is the change in the cost due to change in the activity from one

level to another.


37/47


Opportunity cost is the value of the alternative foregone by adopting a particular

strategy or employing resources in specific manner.

Exa machine is currently used to produce the product p. It can also be used to

produce the product Q which can fetch Rs 60,000 profit . So the opportunity

cost of using the machine is Rs 60,000.

Replacement cost is the cost of an asset in the current market for the purpose of

replacement


38/47


Relevant cost are costs relevant for a specific purpose or situation.

Ex depreciated value of a machine is relevant in case of decision of its sale, but is

irrelevant in case of its decision of its replacement.

Impute cost are hypothetical or notional costs, not involving cash outlay

, computed only for the purpose of decision making

Ex Salary or wages of owner or interest on generated fund


39/47


Sunk costare historical cost which are incurred i.e. sunk in the past and are not

relevant to the particular decision making problem being considered.

Ex book value of assets


40/47


Normal cost is a cost that is normally at a given level of output in the conditions in

which that level of output is achieved.

Abnormal cost is an unusual or a typical cost whose occurrence is usually irregular

and unexpected and due to some abnormal situation of the production.

Ex- idle time for some heavy breakdown or abnormal process loss.


41/47


Avoidable cost are those costs which under conditions of performance efficiency

should not have incurred.

Ex when spoilage occurs in the manufacture in excess of normal limit, the

resulting cost of spoilage is avoidable cost.

Unavoidable cost are inescapable costs which are essentially to be occurred,

within the limits or norms provided for. It is fixed in nature and inescapable.


42/47

Classification by nature of production process

Job costing

Contract costing

Process costing

Batch costing

Unit costing

Operating costing


43/47

Classification by nature of production process(contd.)

Job costing

when work performed against individual order from customers .

Ex - printing press, Car repair shop

Batch costing

factories which has to produce large no of parts in order to make the product

undertake production of each part in batches.

Bicycle factory may produce 100000 handles at one time and then take up the

manufacture of other parts


44/47


contract costing

The term applies to the system of costing which relates to the business

concentrating on big contracts only. Very similar to the job costing.A job is a small contract while contract is a big job.

Unit costing

This method applies when there is production of one product only, as in case of

brewery or colliery.


45/47


Process costing

When a product passes through different stages or processes, each having a

bearing on the total cost of production or each yielding valuable by product.Ex in case of oil three distinct processes - crushing, refining, finishing.

Operating costing

followed by business which renders services .

Ex transport industries, hospitals.


46/47

Classification by time

Historical cost

Standard cost

cost

Predeterminedcost

Estimated cost


47/47

Classification by time(contd.)

Historical cost

The actual cost of producing goods or services. These are postmortem costs

and ascertained after incurred.

Pre-determined costs

the predetermined costs are computed in advance of production, on the basis of

specification of all factors affecting cost.

Predetermined cost can be either standard or estimated.

clasification of cost

Documents