CLASSIFICATION OF COSTS

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 control3.Decision making

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

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.

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

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.

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.

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.

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

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

Classification on the basis of Functions:

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

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

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,

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

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

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

Rakshitha V Nayak