23/04/2012
COST CLASSIFICATION:
(a) By nature of expenses: Costs can be classified into material, labour and expenses as explained earlier.
(b) By function: Costs are classified, as explained earlier, into production or manufacturing cost, administration cost, selling and distribution cost, research and development cost.
— Production cost begins with the process of supplying material labour and services and ends with primary packing of the finished product.
— Administration cost is the aggregate of the costs of formulating the policy, directing the organisation and controlling the operations of an undertaking, whichis not related directly to production, selling, distribution, research and development activity or function.
— Selling cost refers to the expenditure incurred in promoting sales and retaining customers.
— Distribution cost begins with the process of making the packed product available for despatch and ends with making the reconditioned returned empty package available for reuse.
— Research and development cost relates to the costs of researching for new or improved products, new application of materials, or new or improved methods, processes, system or services, and also the cost of implementation of the decision including the commencement of commercial production of that product or by that process or method.
— Pre-production cost refers to the part of development cost incurred in making
trial production run preliminary to formal production, either in a new or a running
factory. In a running factory, this cost often represents research and development
cost also. Pre-production costs are normally considered as deferred revenue
expenditure and are charged to the cost of future production.
(c) By variability: Costs are classified into fixed, variable and semi-fixed / semi-variable
costs according to their tendency to vary with the volume of output.
— Fixed costs tend to remain unaffected by the variation or change in the volume
of output, such as supervisory salary, rent, taxes, etc.
— Variable costs tend to vary directly with volume of output, such as direct
material, direct labour and direct expense.
— Semi-fixed/semi-variable cost is partly fixed and partly variable, such as
telephone expense, electricity charges, etc.
Basics of Cost Accounting
(d) By controllability: Costs can be classified under controllable cost and uncontrollable cost.
— Controllable cost can be influenced by the action of a specified member of an undertaking.
— Uncontrollable cost cannot be influenced by the action of a specified member
of an undertaking.
(e) By normality : Costs can be divided into normal cost and abnormal cost.
— Normal cost refers to the cost, at a given level of output in the conditions in
which that level of output is normally attained.
— Abnormal cost is a cost which is not normally incurred at a given level of
output in the conditions in which that level of output is normally attained.
(f) On the basis of time : Costs, may be classified into historical or actual cost and
predetermined or future cost.
— Historical cost relates to the usual method of determining actual cost of operation
based on actual expenses incurred during the period. Such evaluation of costs
takes longer time, till the accounts are closed and finalised, and figures are
ready for use in cost calculations.
— Predetermined cost as the name signifies is prepared in advance before the
actual operation starts on the basis of specifications and historical cost data of
the earlier period and all factors affecting cost. Predetermined cost is the cost
determined in advance and may be either estimated or standard.
— Estimated cost is prepared before accepting an order for submitting price
quotation. It is also used for comparing actual performance.
— Standard cost is scientifically predetermined cost of a product or service applicable
during a specific period of immediate future under current or anticipated operating
conditions. The method consists of setting standards for each elements of cost,
comparing actual cost incurred with the standard cost, evaluating the variance
from standard cost and finding reasons for such variance, so that remedial
steps can be taken promptly to check inefficient performances.
(9) In relation to the product : Costs may be classified into direct and indirect costs.
— Direct costs are those which are incurred for a particular cost unit and can be
conveniently linked with that cost unit. Direct costs are termed as product cost.
— Indirect costs are those which are incurred for a number of cost units and also
include costs which though incurred for a particular cost unit are not linked
with the cost unit. Since such costs are incurred over a period and the benefit
is mostly derived within the same period, they are called period costs.
