Elements of Cost: Classification of Cost:element wise classification :function wise classification :behavior wise classification: Managerial decision making classification
2. INTRODUCTION:
Cost planning and control have greater significance in the highly competitive market. It
is of utmost importance to the management of a manufacturing concern. It is the first
step towards their decision-making process relating to costs and costing.
Cost is a very vague term and barely has any meaning until it is classified into logical
groups.
Cost Accounting Standard Board set up by Institute of Cost and Works accountants of
India has issued the basis of classification of cost elements in CAS 1.
3. MEANING:
Classification of cost is the arrangement of items of costs in logical groups
having regard to their nature (subjective classification) or purpose
(objective classification).
It is systematic placement of like items together according to their common
features.
4. Types of Classification:
1. Nature wise or Element wise Classification
2. Function wise Classification
3. Behavior wise Classification
4. Time wise Classification
5. Controllability wise Classification
6. Classification for managerial decision making
5. NATURE WISE OR ELEMET WISE CLASSIFICATION
Total
Cost
Material
Direct
Material
Indirect
Material
Labour
Direct
Labour
Indirect
Labour
Expenses
Direct
Expenses
Indirect
Expenses
7. MATERIAL:
Material: The substance from which the finished product is made is known as
material.
1)Direct Material: is one which can be directly allocated or identified to a cost
centre or a cost object.
Ex: Timber in furniture, Cloth in dress, etc.
2)Indirect Material: is the cost of material which cannot be directly allocable or
identified to a particular cost centre or a cost object.
Ex: consumable stores, lubricant oil, printing and stationary, etc.
8. LABOUR:
Labour: The human effort required to convert the materials into finished product.
1)Direct Labour: the cost of wages of those workers who are directly identified
or attributable with a cost centre, product, process etc.
Ex: Wages of the workers, etc.
2)Indirect Labour: the wages of the employees which are not directly allocable to
a particular cost centre, product, process etc.
Ex: Salaries of administrative staff, etc.
9. EXPENSES:
Expenses: expenses other than material and labour.
1)Direct expense: expenses which can be directly allocated to particular job,
process or product.
Ex: excise duty, royalty, etc.
2) Indirect expenses: expenses which cannot be directly allocated to particular
job, process or product.
Ex: Rent of factory, office and show room, insurance, depreciation, etc.
10. FUNCTIONWISE CLASSIFICATION:
Costs should be classified according to the major functions for which
the elements are used into the following four major functions :
1. Production;
2. Administration;
3. Selling
4. Distribution; and
5. Research & Development Expenditure.
11. CLASSIFICATION OF COST BY BEHAVIOUR:
Fixed Cost: Fixed Cost is the cost which does not vary with the change in the
volume of activity in the short run. These costs are not affected by temporary
fluctuation in activity of an enterprise. These are also known as period costs.
Examples for fixed cost : salaries, rent, audit fees, depreciation etc.
The characteristics of fixed costs are:
(1) fixed amount within an output Range
(2) fixed cost per unit decreases with increased output
12. Variable Cost: Variable Cost is the cost of elements which tends to directly vary
with the volume of activity. Variable cost has two parts – Variable direct cost;
and Variable indirect costs. Variable indirect costs are termed as variable
overhead.
Examples of variable costs: materials consumed, direct labour, sales
commission, utilities, freight, packing, etc.
The characteristics of variable Cost:
(1)The variable cost varies directly with volume of activities or production
(2)Variable cost remains constant per unit within a range of activity .
13. Semi Variable Costs:
Semi Variable Costs contain both fixed and variable elements. They are
partly affected by fluctuation in the level of activity.
Examples of semi-variable cost : Factory supervision, maintenance,
power etc.
14. CLASSIFICATION OF COST BY TIME:
A cost item is related to a specific period of time and cost can be classified according to
the system of assessment and specific purpose as indicated in the following ways:
Historical Costs: Historical Costs are the actual costs of acquiring assets or producing
goods and rendering services.
Pre-determined Cost : Pre-determined Costs for a product are computed in advance of
production, on the basis of a specification of all the factors affecting cost and cost data.
Standard Cost: A predetermined norm applied as a scale of reference for assessing actual
cost, whether these are more or less.
Estimated Cost: Estimated Costs of a product are prepared in advance prior to the
performance of operations or even before the acceptance of sale orders.
15. CLASSIFICATION OF COST BY CONTROLLABILITY:
Controllable Costs: The costs which can be minimised by managerial action are
called as controllable costs.
Ex: Direct Materials, Direct wages, Chargeable expenses, etc.
(All variable costs)
Non- Controllable Costs: The costs which cannot be minimised by managerial
decision action.
Ex: Rent, Taxes, insurance etc.
(All fixed costs)
16. CLASSIFICATION FOR MANAGERIAL DECISION MAKING:
Relevant costs: The costs which would be affected by the management decision.
Imputed Costs: The costs which don’t involve actual payment of cash. These are hypothetical or notional
costs used for the purpose of decision making.
Ex: Interest on capital, interest on own building, salary of proprietor, etc.
Opportunity Costs: The value of benefit sacrificed in favour of an alternative course of action.
Sunk Costs: An expenditure made in the part and has no effect future decision making.
Marginal Costs: The aggregate of variable costs. i. e prime cost plus variable overheads.
Differential Costs: It is the change in cost due to change in activity from one level to another.
Implicit Costs: The cost of one investment opportunity which is secrified for getting in another
investment opportunity.
Out of pocket costs: The costs which involve payment of cash to outsiders.
