Classification of Costs

LLearning Objectivesearning Objectives

• Cost Methods & Cost Techniques

• Costing Systems/Methods

• Cost Classification

• Cost Sheet

Cost Methods & Cost Techniques• Cost Methods• 1. Job Costing• 2. Contract• 3. Batch• 4.Process( continuous)• 5. Service( Operating)

• Cost Techniques• 1. CVP Analysis• 2. Standard Costing• 3. Budgetary Control• 4. ABC• 5. Relevant Costing• 6. Target Costing

• Historical • Absorption• Direct• Marginal• Standard• Uniform

Costing System Methods

COST CLASSIFICATION

Elements Behavior Functions Normality Control Decision Making

A: Elements

MATERIAL LABOUR EXPENSES

The ProductThe Product

DirectMaterials

DirectMaterials

DirectLaborDirectLabor

ManufacturingOverhead

ManufacturingOverhead

MATERIAL

• Direct: traceable to one particular process, job or product – identified with each unit of product• Example: manufacturing an apparel • Cloth, collar, buttons, cufflinks, thread Primary packing material (e.g., carton, wrapping,

cardboard, boxes, etc.)• Fuel, lubricating oil etc for operating & maintenance

of machine• Small tools• Materials used for repairs & maintenance

LABOUR

• Inspectors• Supervisors• Internal transport staff• Storekeeper, maintenance staff

EXPENSES

• Expenses leading to a job or contract• Traveling expenses for negotiation• Special pattern, design• Special tools for executing the contract

• Rent• Insurance• Canteen, hospital, power , lighting,

maintenance

B: Behaviour

Fixed in short run & long run

VariableVaries with volume and constant per unit

Semi-variableA cost could be variable for one level of activity whereas it couldbe fixed for another.

Not inherently fixed or variable

Many costs are semi-variable in nature

C: Functions

• Production Cost• Administration Cost• Selling Cost• Distribution Cost

D: Normality

• Normal• Abnormal

E: Control

• Controllable

• Uncontrollable

F: Decision Making

• Marginal vs. Absorption Costing (with fixed cost and without FC)• Sunk - irrelevant• Committed – pre committed• Opportunity • Incremental / Differential• Avoidable & Unavoidable• controllable / uncontrollable