classification of cost · classification on the basis of behaviour fixed costs: costs which do not...

CLASSIFICATION OF COST

Manju Tyagi (B.Ed, MBA, M.Com, MA, Net Qualified)

COST

“the amount of expenditure incurred on or attributable to a given thing”.

COSTING

Costing is the technique and process of ascertaining costs.

In simple words costing is a systematic procedure of determining the unit cost of product/service.


OBJECTIVE OF COST ACCOUNTING

➢Analysis and Ascertainment of costs

➢Presentation of costs for cost reduction and cost control.

➢Planning and decision making


CLASSIFICATION OF COSTS

The main objective of costing is to ascertain cost of each product, process, department, service or operation.

Costs can be classified into different categories depending upon the purpose of their classification.

1. Classification by nature or element.

2. Functional classification.

3. Classification on the basis of behaviour.

4. Classification on the basis of managerial decision making and control.


Classification on the basis of nature or element:-

(a) Direct Costs.

(b) Indirect Costs.


CLASSIFICATION BY NATURE

ELEMENTS OF COSTS

INDIRECT COSTSDIRECT COSTS

MATERIAL

LABOUR

EXPENSE


➢Direct Cost:-

These are costs directly attributable to producing a product.

The following comes under the Direct Cost:-

• Direct Material Cost:- It is the cost of material which can be directly allocated to a cost centre.

Example:-Raw material consumed for production of a product.

• Direct Labour Cost:- It is the cost of wages of those workers who are readily identified or link with cost centre.

• Direct Expense:- These are the expenses other than direct material or direct labour which can be identified with cost centre.


➢Indirect Costs:- These are the costs which can not be assign to any particular cost unit, i.e job product or process.

•Indirect Material:- Material which cannot be directly allocated to a particular cost centre.

•Indirect Labour:- These are the wages of employees which are not directly allocable to a particular cost centre.

•Indirect Expense:- These are the expense other than the nature of material or labour and cannot be directly attributable to a particular cost centre.


FUNCTIONAL CLASSIFICATIONS

PRIME COST

= Direct Material +Direct Labour + Direct Expense.

FACTORY COST

Prime cost + Factory Overheads+ Opening stock of work- in-progress- closing stock of work- in- progress.

COST OF PRODUCTION: Factory cost+ Office and Administration overhead + R&D overheads.


• COST OF GOOD SOLD= : Cost of Production+ Opening stock for finished goods. - closing stock of finished goods

• TOTAL COST= Cost of good sold + Selling & distribution overhead.


CLASSIFICATION ON THE BASIS OF BEHAVIOUR

➢Fixed costs: Costs which do not vary with the level of production are known as fixed costs.

➢Variable Cost:- Costs that vary in direct proportion to the volume of production.

➢Semi-variable costs:- Costs which contain both fixed and variable components are called semi -variable costs


CLASSIFICATION ON THE BASIS OF MANAGERIAL DECISION MAKING & control

➢ Marginal costs: Costs of producing one additional unit. It is useful for price fixation.

➢Opportunity costs: It refers to the value of sacrifice made for benefit of opportunity foregone in accepting an alternative course of action.

➢Normal & Abnormal costs: Normal costs are normally incurred at a given level of output, while Abnormal cost is an unusual or unexpected and due to some abnormal situation of the production.


➢ Sunk Costs: It is a cost which has been already incurred or sunk in the past. It is not relevant for decision making.

➢Imputed cost: The cost which do not involve any expenditure in real sense. They included in cost accounts only for taking managerial decisions.


FORMAT OF COST SHEET


Note:➢ Direct wages, Productive Wages, Manufacturing

wages, Wages paid to labour means the same.

➢Chargeable expenses treated as Direct expenses.

➢Consumable Stores treated as Factory Expenses it means factory oil, Grease, Cotton etc.

➢ If Depreciation is given but question does not specify its relation to asset pertaining to factory office etc, then we consider it to be factory overhead.

➢ Some time Cost sheet divided in to two parts:

•Up to cost of Production- Cost Sheet

•Cost of production to Sales – Statement of Profit


Items not including in Cost Sheet

➢Interest on Bank Loan, Debenture, Mortgages etc.

➢Loss on sale of fixed Assets.

➢Expenses on transfer of Company`s Office.

➢Damage Payable.

➢Penalties and Fine.

➢Remuneration paid to the Proprietor in excess of a fair reward for service rendered.

➢Loss to business property on account of theft, fire or other natural calamities.



➢Interest received on Investment and on Bank Deposit.

➢Profit on sale of Fixed Assets.

➢Transfer fees received.

➢Any Income Received i.e. rent received, Dividend received etc.

➢Brokerage, Discount, Commission etc received.



➢ Appropriation to sinking food.

➢Dividend paid.➢Taxes on income and Profit.

➢Transfer to General Reserve.➢Excess provision for Depreciation on Building, Plant

etc. and for Bad Debts.

➢Amount Written off on Goodwill, Preliminary Expenses, Underwriting Commission, Discount on Debentures Issue, Expenses on Issue of Shares.

➢Charitable Donation.


Particulars Total Cost Per unit Cost

Direct Material 20,000

Direct Labour 8,000

Prime Cost 28,000 28.00

Add:- Factory Overheads

Indirect Labour 2,500

Supervision Cost 1,000

Factory Rent 1,600

Factory Lighting 600

Oil for Machine 100

Depreciation of Machines 500 6,300 6.30

Work Cost 34,300 34.30


Add:- Office and Administration Expenses

Office Overheads 8,000

Office Salary 2,000

Misc. Expenses 1,000 11,000 11.00

Cost of Production 45,300 45.30

Add:- Selling & Distribution Overheads 6,000 6.00

Total Cost 51,300 51.30

Profit 10,260 10.26

Sales 61,560 61.56


Answer:

Prime cost = 92,300

Work Cost = 99,800

Cost of Production = 1,06,300

Cost of Sales = 1,09,000


NATURE OF COST ACCOUNTING

(I)Cost accounting is an organized body of knowledge.

(II)These certain principles to which the technique of costing should be applied.

(III) These principles and rules have been developed over a period of time by experience.

(IV)Besides being a science, cost accounting is an art also. Its principles, rules and techniques are not static but dynamic.


(V)Although it is an organized body of knowledge, its principles can not be verified and proved by experiments. Hence, it is not an exact science. Since it is operated by human beings, so it is a behavioral science.

(VI)Old principles and techniques are replaced by new. It not only lays down the rules but also shows the way of achieving the objectives for which it is installed.


Scope of Cost Accounting• 1. Cost Ascertainment

In this region of cost accounting, cost accounting collects product's material, labor and overhead cost and try to calculate total and per unit cost of product. This total cost calculation will be based on historical or standard or estimated basis. After this, cost accountant will use any method of costing like specific order costing, operation costing, and direct costing technique.


2. Cost Records

In this part of cost accounting, cost accountant maintains costbooks, vouchers, ledgers, reports and other cost relateddocuments for future comparison and reference. It will also beunder the scope of cost accounting.


3. Cost Control

This is the end boundary of cost accounting scope. In this division, cost accountant used different techniques and methods for controlling the cost. Save One Rupees in the cost of product means we have earned one rupees in the production of goods. So, Cost accountant uses budgetary control, standard costing, break even point analysis and many other techniques for controlling the cost.


ADVANTAGES OF COST ACCCOUNTING

• Cost accounting is not only helpful to provide cost information for internal use by management but it also helps management in setting objectives and programme of operation in comparing actual performance with expected performance.


BENEFITS

• Provide data and cost information

• Disclose operating efficiency

• Helpful in decision making

• Maximum utilization of resources

• Help financial accounting

• Helpful in avoiding losses


RELATIONSHIP BETWEEN COST AND MANAGENENT ACCOUNTING


THE FOLLOWING ARE THE MAIN POINTS OF RELATION BETWEEN COST AND MANAGEMENT ACCOUNTING:-

• 1)OBJECT : The object of cost accounting is to record the costof producing a product or providing a service. The cost isrecorded product wise or unit wise. Besides recording, it dealswith cost control, matching of cost with revenue and decision-making. The purpose of management accounting is to provideinformation to the management for planning and co-ordinatingthe activities of the business.


2.SCOPE : The scope of management accounting is very wide. It includes financial accounting, Cost accounting, budgeting, tax planning, reporting to management and interpretation of financial data.

• On the other hand , cost accounting deals primarily with cost ascertainment.

3.NATURE : Management accounting is generally concerned withthe projection of figures for future. The policies and plans areprepared for providing future guidelines.

• Cost accounting uses both past and present figures.


4.DATA USED : In cost accounting only those transactions are taken which can be expressed in figures only quantitative aspect is recorded in cost accounting. Management accounting uses both quantitative and qualitative information.

5.DEVELOPMENT : The development of cost accounting is related to industrial revolution. Financial accounting could not satisfy information need of management.

• Cost accounting was thus evolved as supplementary accounting methods. Cost accounting was able to provide information not only about cost structure but also for planning and decision-making.

• Management accounting has developed only in the last 30 years.

• Management accounting and cost accounting are bothcomplementary subjects.


6.PRINCIPLE FOLLOWED : Certain principles and procedures arefollowed for recording cost of different products. The same rulesare applicable at different times too .

• No specific rules and procedures are followed in reporting management accounting.

• The information is prepared and presented as is required bythe management.


classification of cost · classification on the basis of behaviour fixed costs: costs which do not...

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