cost class if cation

8/9/2019 Cost Class if Cation

http://slidepdf.com/reader/full/cost-class-if-cation 1/24



Amity School of Business

Cost Concepts/ Cost Classification

On the basis of Business Function: Direct and Indirect costs.

Manufact uring and Non manufact uring costs.

Prod uct and Period Costs.

On the basis of normality:

Normal cost and abnormal cost.

2




On the basis of planning and Control:

Fixed and variable costs.

Controllable and Non-controllable.

On the basis of Decision Making:

Sunk Costs.

Relevant and Irrelevant costs.

Incremental Costs.

Differential costs.

O ut of pocket.

Replacement costs.

3




On the basis of Business Function

Direct costs Costs that can be easily and conveniently traced to a unit of

prod uct or other cost objective.

Examples: Direct material, Direct labor and Direct expenses.

Direct Material: The cost of material entering into and becoming

constit uent element of prod uct or saleable service.

Direct labor: The cost of remu

neration for employees efforts and skills applied directly to a prod uct or saleable service.

Direct expense: The cost other than material and labor which are

incurred for a specific prod uct or saleable service.4




Indirect costs

Costs cannot be easily and conveniently traced to a unit of prod uct or other cost object.

Example: Manufact uring O verhead.

5




Manu

fact u

ring overheads (Indirect Costs) Included all overhea ds other than direct material, direct labor,

direct expenses.

6

Examples: Indirect labor and indirect materials

Wages paid to employees whoare not directly involved in

production work.Examples: maintenance workers

and security g uards.

Materials used to support theproduction process.

Examples: lubricants and cleaning supplies used in the a utomobile

assembly plant.




Classifications of Costs

Direct

Material

Direct

La bor

Manufact uring

O verhea d

Prime

Cost

Conversion

Cost

Manufact uring costs are often classified as follows:




Product Costs Versus Period Costs

Pro

duct costs incl

ude

direct materials, direct la bor, and

manufact uring overhea d.

Perio

dcosts are not incl

ude

din

product costs. They are expensed on

the income statement.

Period costs are recorded as

expenses of the accounting period

in which they are incurred.

Inventory Cost of Good Sold

Balance

Sheet

Income

Statement

Sale

Expense

Income

Statement




Flow of Manufact uring Costs

9

Direct Materials

Direct La bor

Factory O verhea d

Work in Process

(Assets)

Finished Goods

(Assets)

Cost of Goods Sold

(Expenses)




Element Wise classification

According to the nature of and source of expenditure, the overheads areclassified into:

Indirect Material:

Materials other than direct material cost.

It cannot be allocated but can be apportioned to cost centres and costunits.

Example: Oil, grease etc.

Indirect labour:

Wage cost other than direct wage cost.

It cannot be allocated but can be apportioned to cost centres and cost

units.

Example: Staff of personnel department, Idle time wages.

10




Fixed costs:

That does not change with

the change in the level of

activity. Examples: Depreciation,

Rent, Supervisors salary.

12

Whichcannot be

easily orquickly eliminated.

Eg: Depreciation, Property Taxes, lease

rentals.

Fixed Costs

Which canbediscontinued

at management discretion.

Eg: a d vertisement programmes,

A dministrativ

e salary

Discretionary Fixed Costs

Thumb Rule

Think of fixed costs as a total. Total fixed costs remain unchanged

regardless of changes in cost-driver activity

On the Basis of Planning and Control




13





Varia ble Costs

Where total varies directly

and proportionally with the

volu

me of activity. There is a fixed ratio between

the change in cost and change

in activity.

14

T humb R ule

T hink of variable costs on per unit basis. T he per-unit variable cost remains

unchanged regardless of changes in the cost-driver activity.

Variable Costs




15





Semi Varia b

le Cost Contains both fixed and variable elements.

Partly effected by the fluctuation in the level of activity.

For example: telephone expenses include a fixed portion of annual charge

plus variable charge according to calls.Types of Semi variable costs

16

Semi variable costs

Variable elementoperates at all thelevels of activity.

Semi variable costs

Variable elementcomes intooperation aftercertain level of activity.





Controlla ble Costs

Manager has a direct and complete decision a uthority.

Two basic characteristics:

Level of Organization.

Point of time.

Non Controlla ble Costs

Beyond the influence of manager beca use he cannot a uthorize it.

Example: Depreciation of wareho

use will not

be controlla

ble

b y the production manager or sales manager.

To determine whether the cost is controlla ble or non- controlla ble,

both the characteristics m

ust

be consi

dere

dconc

urrent 17




On the basis of Decision Making

Relevant Costs

Vary depending upon the alternative selected in a particular

decision.

Irrelevant Costs

Not effected b y the decision taken or b y the option selected.

18





Su

nk Costs Those costs have alrea d y been incurred and spent.

Sunk costs cannot be changed b y any decision. They are not

differential costs and should be ignored when making decisions.

These costs are create

d b y a

decision in the past an

dno present or f ut ure decision can change such costs.

Example: The written down value of the fixed asset.

Differential Costs Costs that differs between decision alternatives.

The differential cost may be incremental or decremental.

19





Opport unity costs The costs that measures the next best alternative that is lost or

sacrificed.

The choice of one course of action is given b y rejecting the other.

Does not involve any flow of cash or payment.

Not found in the accounting system.

Every decision maker must incorporate the expected

benefits that have been sacrificed.

20





Out of pocket costs Signifies the cash outlay required for undertaking project.

Management is interested in knowing whether the income from

the particular project will at least cover the expendit ure on that

project.

Replacement cost

The cost of replacing an assets at current market value.

Example : cost of replacing a machinery is considered, it meansthe cost of purchasing a machinery at the current market price

and not the price at which it was purchased.

21





Avoida ble cost Cost that can be eliminated in case of product or department is

discontinued.

Unavoida ble cost Indirect cost that cannot be eliminated with the discontinuation

of a product or department.

Example: Rent of factory, salary of production manager.

22




On the basis of Normality

Normal cost Cost which is normally incurred at a given level of output in the

condition in which that level of output is normally attained.

Example: Idle time for factory workers.

A bnormal cost

Cost which is not normally incurred at a given level of output in

the conditions in which that level of output is normally attained.

Example: Strikes, lockouts in a factory.

23

cost class if cation

Documents