Basics

2. Classification of Costs
PREPARED BY: SANAM
YOUNASI
LECTURER: KARIMULLAH
EZAM
CLASS: 2ND YEAR, 3RD
SEMESTER
Islamic Republic of Afghanistan
Ministry of Higher Education
Kandahar University

3. Table of Contents:
1
Introduction
Need for cost classification
Methods of classification
Classification of costs
 Material
• Direct materials
• Indirect materials
 Labor
• Direct labor
• Indirect labor
 Other Expenses
• Direct Expenses
• Indirect Expenses
Overheads
Items to be excluded from cost sheet
Division of costs

4. Introduction
‫دی؟‬ ‫څشی‬ ‫مصرف‬
‫پیس‬ ‫په‬ ‫ارزښت‬ ‫مصارفو‬ ‫تولیداتود‬ ‫او‬،‫االتو‬ ‫سامان‬ ،‫قوي‬ ‫کاری‬ ،‫خدماتو‬ ،‫اجناسو‬ ‫د‬
‫سره‬ ‫و‬
،‫رسیژی‬ ‫مصرف‬ ‫په‬ ‫یا‬ ‫رانیول‬ ‫لخوا‬ ‫تصدی‬ ‫یو‬ ‫د‬ ‫چی‬
cost
‫کیژی‬ ‫بلل‬
.
‫ده؟‬ ‫څشی‬ ‫بندی‬ ‫طبقه‬ ‫مصرف‬ ‫د‬
‫ویشل‬ ‫مصارفاتو‬ ‫مختلفو‬ ‫شته‬ ‫کی‬ ‫تصدی‬ ‫یا‬ ‫تجارت‬ ‫یو‬ ‫د‬ ‫بندی‬ ‫طبقه‬ ‫مصارفو‬ ‫د‬
‫د‬ ‫هغوی‬ ‫د‬
‫اهداف‬ ‫محاسبوی‬ ‫ترڅو‬ ‫اساس‬ ‫پر‬ ‫خصوصیاتو‬ ‫مختلفو‬ ‫نورو‬ ‫او‬ ‫اهمیت‬ ،‫جوړښت‬ ،‫ډول‬
‫سی‬ ‫ترالسه‬
.
2

5. Need for cost classification

‫اهمیت‬ ‫او‬ ‫ضرورت‬ ‫لپاره‬ ‫بندی‬ ‫طبقه‬ ‫د‬ ‫مصارفو‬ ‫د‬
:
‫کول‬ ‫تعین‬ ‫او‬ ‫کول‬ ‫مشخص‬ ‫مصارفو‬ ‫د‬
.
‫ارزول‬ ‫او‬ ‫تحلیل‬ ‫موثریت‬ ‫د‬ ‫ډیپارټمینټونو‬ ‫عملیاتی‬ ‫او‬ ‫تولیدی‬ ‫مختلفو‬ ‫د‬
.
‫معلومول‬ ‫ګټه‬ ‫ناخالص‬ ‫او‬ ‫تحلیل‬ ‫مصارفو‬ ‫تولیدی‬ ‫د‬
.
‫مدیریت‬ ‫او‬ ‫کنترول‬ ،‫تحلیل‬ ‫مصارفو‬ ‫مجموعی‬ ‫د‬
.
‫ټاکل‬ ‫قیمت‬ ‫د‬
(
‫مصارف‬ ‫متغیر‬ ‫او‬ ‫ثابت‬
)
3

6. Cont..
Pricing policy
Ascertaining of
profits
Current application
of plans and policies
Controlling of
costs
In budgeting
and planning
process
4
Need of cost
classification

7. Methods of Classification:

‫شویدی‬ ‫ویشل‬ ‫ډولونو‬ ‫مختلف‬ ‫پر‬ ‫کبله‬ ‫له‬ ‫اساساتو‬ ‫مختلف‬ ‫د‬ ‫مصارف‬
:
.1
Elements
(
‫اساس‬ ‫په‬ ‫عناصرو‬ ‫یا‬ ‫تولید‬
)
.2
Functions
(
‫اساس‬ ‫په‬ ‫کار‬ ‫یا‬ ‫اجراتو‬ ‫د‬
)
.3
Idintifibality
(
‫اساس‬ ‫په‬ ‫پیژندګلوی‬ ‫د‬
)
.4
Behavior
(
‫اساس‬ ‫په‬ ‫سلوک‬ ‫یا‬ ‫عاداتو‬ ‫د‬
)
.5
Controllability
(
‫اساس‬ ‫په‬ ‫اداره‬ ‫یا‬ ‫کنترول‬ ‫د‬
)
.6
Normality
(
‫اساس‬ ‫په‬ ‫نورمالیټی‬ ‫د‬
)
.7
Time
(
‫اساس‬ ‫په‬ ‫وخت‬ ‫د‬
)
.8
Association
(
‫اساس‬ ‫په‬ ‫ملتیا‬ ‫د‬
)
.9
Investment
(
‫اساس‬ ‫په‬ ‫ګذاری‬ ‫سرمایه‬ ‫د‬
)
.10
Relevancy
(
‫اساس‬ ‫په‬ ‫ارتباط‬ ‫د‬
)

8. 6

9. 1. Classification of Costs by Elements
7
•
materials:
:
‫کی‬ ‫پروسه‬ ‫په‬ ‫تولید‬ ‫د‬ ‫چی‬ ‫مصارف‬ ‫مواد‬ ‫خام‬ ‫هغه‬ ‫ټول‬
‫وی‬ ‫سوی‬ ‫کارول‬
.
•
Labor
:
‫مصارف‬ ‫نور‬ ‫او‬ ‫معاشات‬ ،‫مزد‬ ‫کارکوونکو‬ ‫د‬ ‫تصدی‬ ‫یو‬ ‫د‬
.
•
Other Expenses
:
‫د‬
materials
‫نور‬ ‫پرته‬ ‫څخه‬ ‫قوی‬ ‫کاری‬ ‫د‬ ‫او‬
‫کیژی‬ ‫اجرا‬ ‫کی‬ ‫مرحله‬ ‫په‬ ‫تولید‬ ‫د‬ ‫چی‬ ‫مصارفات‬
.

10. 8

11. Materials Costs:
ICMA, London:” the cost of commodities supplied to an undertaking’’

Direct materials
‫سی‬ ‫کیدای‬ ‫مشخص‬
‫سی‬ ‫کیدای‬ ‫اندازه‬
‫تشکیلوی‬ ‫برخه‬ ‫یو‬ ‫اجناسو‬ ‫کارتمامه‬ ‫د‬
‫پنبه‬ ‫کی‬ ‫جوړولو‬ ‫کالیو‬ ‫د‬ ‫لکه‬

Indirect material
‫تشکیلوی‬ ‫نه‬ ‫برخه‬ ‫یو‬ ‫اجناسو‬ ‫کارتمامه‬ ‫د‬
‫نسی‬ ‫کیدای‬ ‫مشخص‬
‫دی‬ ‫کوچنی‬ ‫ډیر‬ ‫لحاظه‬ ‫له‬ ‫ارزښت‬ ‫او‬ ‫اهمیت‬ ‫د‬
‫غوړی‬ ‫او‬ ‫تیل‬ ‫لکه‬
9

12. Cont..
10
Direct materials Indirect materials
1. Can be identified
2. Form a part of
finished products
3. Directly enter the
product and form a part
of it.
1. Cannot be identified
2. Minor in importance,
small, inexpensive and
do not physically
become a part of
finished goods.
3. Refers to the company
from a part of
company overheads

13. Labor Costs:
ICMA, London: ‘’ the cost of remuneration (wages, salaries, commission,
bonus) of the employees of undertaking.’’

Direct labour
‫وی‬ ‫شامل‬ ‫کی‬ ‫فعالیتونو‬ ‫تولیدی‬ ‫ډول‬ ‫مستقیم‬ ‫کاریګر‬
‫دی‬ ‫شامل‬ ‫کاریګر‬ ‫لرونکی‬ ‫نه‬ ‫مهارت‬ ‫او‬ ‫لرونکی‬ ‫مهارت‬ ‫کی‬ ‫برخه‬ ‫پدی‬

Indirect labour
‫وی‬ ‫نه‬ ‫شامل‬ ‫کی‬ ‫فعالیتونو‬ ‫تولیدی‬ ‫ډول‬ ‫مستقیم‬ ‫کاریګر‬
‫ډله‬ ‫صفاکارو‬ ‫د‬ ‫لکه‬
11

14. PRODUCT A PRODUCT B
Feature 1
Feature 2
Feature 3
12
Cont..
Direct Labour Indirect Labour
1. Directly engaged in
production process
2. Wages can be
identified
3. Baker, carpenter, shoe
maker, tailor are
examples
1. Help in production
process.
2. Wages are of a general
character and cant be
identified
3. Supervisor, inspector,
cleaner, watchmen are
examples.

15. Other Expenses:
ICMA, London : ‘’the cost of services provided to an undertaking and the
notional cost of the use of owned assets.’’

Direct Expenses
‫پر‬ ‫او‬ ‫تولید‬ ‫یو‬ ‫د‬ ‫مصارف‬ ‫ټول‬ ‫نور‬ ‫مصارف‬ ‫قوی‬ ‫کاری‬ ‫مستقیم‬ ‫او‬ ‫مصارف‬ ‫موادو‬ ‫مستقیم‬ ‫له‬ ‫پرته‬
‫دا‬ ‫وسی‬
‫راځی‬ ‫کی‬ ‫برخه‬ ‫دی‬
.
Prime costs
‫جوړوی‬ ‫برخه‬ ‫یو‬
design and layouts, surveyor’s fees

Indirect expenses
‫تو‬ ‫یو‬ ‫د‬ ‫مصارف‬ ‫ټول‬ ‫نور‬ ‫مصارف‬ ‫قوی‬ ‫کاری‬ ‫غیرمستقیم‬ ‫او‬ ‫مصارف‬ ‫موادو‬ ‫مستقیم‬ ‫غیر‬ ‫له‬ ‫پرته‬
‫او‬ ‫لید‬
‫کرایه‬ ‫لکه‬ ‫راځی‬ ‫کی‬ ‫برخه‬ ‫دی‬ ‫دا‬ ‫پروسی‬
.
13

16. Overheads:
Indirect materials+ indirect labour+ Indirect other expenses=overheads
a) Factory or production or works or manufacturing overheads
b) Office or Administration or establishment or management overheads
c) Selling overheads
d) Distribution overheads
14

17. Items to be Excluded:
15
•
‫او‬ ‫لری‬ ‫خاصیت‬ ‫مالی‬ ‫چی‬ ‫لری‬ ‫شتون‬ ‫څیزونه‬ ‫مشخص‬ ‫ځینی‬
‫د‬
‫کی‬ ‫نظر‬ ‫صرف‬ ‫ورڅخه‬ ‫کی‬ ‫جوړولو‬ ‫په‬ ‫اکاونټونو‬ ‫د‬ ‫مصارفو‬
‫ژی‬
‫په‬ ‫چی‬
۴
‫کیژی‬ ‫ویشل‬ ‫ډولونو‬
:

Financial incomes

Financial charges

Appropriations

Abnormals

18. Financial Incomes:
Capital profits
Dividend received
Brokerage
Commission received
Share transfer fees
received
Interest on investments
Rent received
Bad debts recovery
Interest on loan given
Discount received
Interest on bank deposits
16

19. Financial charges:
Capital losses
Cash discount
Trade discount
Penalties and fines
Share transfer fees paid
Interest on bank loans
Interest on debenture
Preliminary expenses
Income tax
Wealth tax
Underwriting commission
Discount on issue of shares and
debentures
Loss on investments
Capital expenses
Interest on capital
Salary or commission paid to
partners
Interest on debentures
Reconstruction expenses
Development, reorganization
expenses
17

20. Appropriations:
Bad debts
Dividend or bonus paid
Charitable donation
Transfer to reserves
General reserves
Machinery replacement
fund
Investment fluctuation
fund
Debenture redemption
fund
Sinking fund
18

21. Abnormals:
Abnormal wastages
Abnormal idle time
Loss by fire
Loss by theft loss of stocks
Insurance premium
19

22. Division of costs:
1. Prime cost= direct materials+ direct wages+ direct
expenses
2. Works costs= prime costs+ works overheads
3. Cost of production= works cost+ office and
administration overheads
4. Total cost/ cost of sales= cost of production+ selling
and distribution overheads
5. Selling price= total cost/ cost of sales+ profit or - loss
20

23. 2. FUNCTIONS
COSTS ARE CLASSIFIED ACCORDING TO BUSINESS PROCESS

24. THREE TYPES:
Factory cost: all costs incurred in production process i.e. right from the supply of the products till
the completion. Ex. depreciation, material costs, machinery cost…
Administration cost: all those costs incurred from the management decision makings. Ex.
Depreciation on office equipment, insurance, staff wages…
Selling and distribution costs: costs incurred from selling and distribution of the product. Ex.
Wages cost, marketing costs…
Research and development costs: all costs incurred for research and development. Ex. Costs for
searching, design…

25. 3. Identifiability

26. TWO TYPES
DIRECT COST: it is the cost of main material of the product and is reflected in finished product.
And it contains all direct elements
Ex. Cost of cotton in textile industry, cost of timber in furniture industry
INDIRECT COST: It contains all indirect elements for production. Ex. Rent, salaries of officers,
printing costs…

27. x

28. 4. BEHAVIOUR

29. THREE TYPES
FIXED COSTS: are those costs which are fixed and will not change by increase or decrease in
production, but is changeable per unit. Cost of salaries, wages, rent…
VARIABLE COST: which may change in increase or decrease of production but is fixed per unit.
Ex. Cost of raw materials, direct labor cost.
SEMI-VARIABLE OR SEMI-FIXED COSTS: they the mixture of variable and fixed costs. Ex.monthly
telephone charges, indirect labor cost, repairs..

31. 5. CONTROLLABILITY
ACCORDING TO THE BUSINESS’ ABILITY TO CONTROL THE COSTS

32. TWO TYPES
CONTROLABLE COSTS: all those costs which are under the control of the management.
Variable costs are generally classified as CONTROLLABLE costs. Ex. Advertisement cost, training,
direct cost
UNCONTROLABLE COSTS: Those cost which are not under the control of the management.
fixed costs are classified as UNCONTROLABLE costs. Ex. rent expense, depreciation…

33. 6. NORMALITY
ALL THOSE COST WHICH NORMALLY ARE INCURRED

34. TWO TYPES
NORMAL COST: all those cost that are incurred normally in the production process.
Ex: depreciation, carriage inward, actual material cost, actual labor cost…
ABNORMAL COST: all those unusual costs that are incurred.
Ex: stolen materials, destruction due to fire, lock out, shut down …

35. 7. TIME
COSTS INCURRED DEPENDING UPON TIME!

36. TWO TYPES
HISTORICAL COST: all those which already have been incurred.
- based on recorded facts
- can be verified with the help of supported documents
- objective in nature
PRE-DETERMINED COST: all those costs which have not been incurred but are forecasted by the
managers to determine the performance of the business.

37. 8. ASSOCIATION

38. TWO TYPES
PRODUCT COST: all those costs which are directly associated with production and can be
transferred to the next year as closing stock.
Ex. Direct labor, direct materials, factory overhead.
PERIOD COSTS: all those costs which are incurred during and particular period and can’t be
transferred to the next year.
Ex. Indirect labor, indirect materials, indirect expenses, administrative expenses, rent, office
depreciation…

39. 9. BASIS OF
INVESTMENT
COSTS INCURRED DEPENDING UPON INVESTMENT

40. TWO TYPES
CAPITAL COST: those costs which are intended to benefit in the future.
Ex. Business equipment, purchase of fixed assets, acquisition of intangible assets…
REVENUE COST: costs which will benefit us in current period. Ex. Cost of sales discount,
materials, commissions…

41. 10. BASIS OF
RELEVANCY
COSTS ARE CLASSIFIED ACCORDING TO RELEVANCY WITH BUSINESS
DECISION MAKING.

42. TWO TYPES
RELEVANT COSTS : costs which are avoidable and is effected by business decision making and
can effect future cash flow.
Ex. Selling one more unit of product
IRRELEVANT COST: which can’t be avoided and has already incurred and is not effected by
decision making of the business, and are incurred in the past.

43. TYPES OF COSTS
THESE TYPES ARE USED FOR DECISION MAKING OF THE
ORGANIZATION NOT FOR RECORDING.

45. MARGINAL COST
According to ICMA, London “the variable cost of producing one more unit of product”.

46. STANDARD COST
It is pre-determined estimated cost by the organization.
CONVERSION COST:
Is the cost of direct elements of converting raw materials to finished goods.
SUNK COST:
Costs which are incurred in the past, can’t be returned and does not have any effect in future decision
making.

47. APPRTUNITY COST:
ICMA, London-defines it as “the value of benefit in favor of an alternative course of action.”
OUT-OF-POCKET COST:
Costs which needs cash payments, It can either be fixed or variable. Ex. Fixed and variable costs, which
can be paid by cash only.
REPLACEMENT COST:
It is current market price of replacing an existing asset. Ex. To sell furniture at the current price.

48. IMPUTED COST:
ICMA, London-defines it as “a hypothetical cost taken into account to represent a benefit
enjoyed by the undertaking in respect of which no actual expense is incurred.”
DIFFERENTIAL COST:
It refers to the difference between the cost of two alternative decisions.
Ex. If the cost of alternative A is 10000$ per year and the cost of alternative B is 8000$ per year.
The difference of 2000$ would be differential cost.

49. AVOIDABLE COSTS:
Can be avoided by discontinuation of particular product or department.
Ex. A manufacturer with many product lines can drop one of the lines, thereby taking away
associated expenses such as labor and material…
UNAVOIDABLE COSTS:
Can’t be avoided by discontinuation of particular product or department.
Ex. Salary of managers, depreciation on assets, property taxes, lease payments, interest cost…

50. JOINT COST:
Are those costs which are incurred during joint process.
Ex. Feeding both cattle and sheep, company can use kernels for roasting and crushing.
RELAVANT AND IRRELEVANT COSTS:
Relevant cost are those costs that would be changed by decision.
Irrelevant cost are those costs that would not be effected by the decision.

52. OTHER TYPES OF COSTS
DISCRETIONARY COST:
avoidable costs that can be eliminated in the short-run without immediate impact on the short-
term profitability of business. Ex. advertising, trainings, R&D, maintenance….
ENGINEERED COST:
Are those costs which vary directly with the level of production. Ex. Direct materials and direct
labor can be directly linked to output, and therefore are considered as engineering cost.

53. SHUT DOWN COST:
Are those costs that still happen although a plant is shut down temporarily and can be saved if
the firm starts its own business. Ex. If the company is shut down but still has to pay the rent
TRACEABLE COSTS:
These are costs which can easily be identified with cost unit or cost centers.
Ex. A company is planning to eliminate an entire product line, and wants to understand which
expenses will be determined when the product line is shutdown. The costs traceable to the
product line include advertising expenses, a marketing specialist, a production line, and a
warehouse.