The document discusses the classification of costs according to different criteria. There are three main classifications: (1) Classification based on elements of cost such as direct materials, direct labor, indirect expenses etc. (2) Classification based on functions like product cost, variable cost, fixed cost etc. (3) Classification based on behavior which includes variable, fixed and mixed/semi-variable costs depending on how they change with production volume.

2. CLASSIFICATION
OF COSTS

3. INTRODUCTION TO COST ACCOUNTING:
Cost accounting is a quantitative
method that
accumulates, classifies, summarizes and
interprets financial and non-financial
information for 3 major purposes, they
are, 1.Ascertainment of cost of a
product or
service
2.Operational planning and control
3.Decision making

4. Classification of costs:
Cost classification is the process of grouping
costs according to their common features or
characteristics. Classification of costs is
necessary for detailed recording and accurate
cost ascertainment. Cost can be classified
according to,
1.Elements
2.Functions
3.Behaviour

5. Classification on the basis of
element of cost:
On the basis of element of cost can be classified
into following types,
1.Direct materials- Direct materials are
those materials which enter into part of the
product, the cost of which from part of the prime
cost. Direct materials are also called process
materials or prime cost materials . It includes all
materials specially purchased for a particular
process, job or production order.
Ex-The clay in bricks, the wood in furniture, the
leather in shoes etc.

6. 2.Indirect materials - Indirect
materials are those which can not be traced
as a part of the product. But they are
necessary for the production process.
Indirect materials are also known as on cost
materials or expense materials.
Ex- Fuel, lubricating oil etc required for
operating and maintaining plant and
machinery Small tools for general use

7. 3.Direct wages -Direct wages are the
cost of remuneration, such as
wages, salaries, commissions, bonus etc
Direct wages refers to the cost of wages
paid to operatives who help in altering the
construction, composition, conformation or
condition of the product manufactured by a
concern.
Ex- wages paid to drivers It is also called as
direct labor or productive labor or process
labor.

8. 4.Indirect wages - Indirect wages
represent the cost of labor employed in the
works or factory which is ancillary to
production. In short, wages which can not be
directly identified with a job, process or
operation are generally treated as indirect
wages.
Ex-a. General indirect labour such as
inspectors, supervisors etc
b.Micsellaneous allowances to labour.

9. 5.Direct Expenses -Direct expenses
are those which are neither direct material
cost nor direct wages but directly
identifiable with a job process or operation.
Direct expenses are also known as
chargeable expenses, prime cost
expenses, productive expenses etc
Ex-a. Hire charge of a special concrete
mixer required for civil engineering job.
b. Cost of special pattern, drawing or
layout.

10. 6. Indirect expenses -Indirect expenses which
can not be charged to a product directly and
which are neither indirect material cost nor
indirect wages are regarded as indirect
expenses.
Ex-a. Rent, rates and taxes
b. Insurance
c. Canteen expenses

11. Classification on the basis of
Functions:
On the basis of functions of manufacturing concerns the
costs can be classified to the following types
1.Product cost -This is the cost of sequence of operations
which begins with supplying materials, labour and
services and ends with primary packing of the product.
Therefore
production represents
prime cost + absorbed production over head

12. 1.Variable cost- It is the cost which tends to
follow (in the short term) the level of activity
, this cost will tend to vary directly with
output. Variable costs are also known as
direct costs.
Ex- a. Direct materials
b. Direct labor
c. Direct expenses

13. 2.Administration cost-It refers to the cost of management
and of secretarial accounting and administrative
service, which can not be directly related to
production, marketing, research or development functions
of the enterprise.
In short administration expenses are in the nature of
indirect expenses and include the following,
Ex-a. Salaries of office staff, accountants directors etc
b. Maintainance of factory estate etc
3.Marketing cost- The cost incurred in researching the
potential markets and promoting products in suitable
attractive forms and at acceptable prices. It includes the
selling cost, publicity cost, distribution cost etc

14. Classification on the basis of
Behviourwise:
With the increase or decrease in production , some
costs will increase or decrease directly, some costs
will remain unaffected while others will change but
not in direct proportion to the change in volume
, thus costs can be grouped according to their
behaviour as,

15. 2.Fixed cost -It is defined as the cost which accures in
relation to the passage of time and which within
certain output and turnover limits, tends to be
unaffected by fluctuations in the levels of activity
( output or turnover). Other terms used include
period cost and policy cost.
Ex-a. Rent and rates of the factory building
b. Depreciation of building
c. Insurance

16. 3.Mixed cost- These contains both fixed and
variable characteristics over various relevant
ranges of operation. These are 2 types,
1.Semi-variable cost-The fixed part of a
semi-variable cost usually represents a
minimum fee for making a particular
item/service available. The variable portion is
the cost charges for actually using the service.
Ex-Truck rentals, equipment rentals and
utilities

17. Step cost -The fixed part of step costs
changes abruptly at various levels of activity
because these costs are acquired in
indivisible portions. A step cost is similar to a
fixed cost within a very small relevant range.
Ex-a. salary to supervisor
b. Inspection cost

18. Rakshitha V Nayak