Cost Classification
COST ACCOUNTING - INTRODUCTION
Accounting for determination and control of costs.
COST ACCOUNTING: The Institute of Cost and Management
Accountant, England (ICMA) has defined Cost Accounting as – “the process
of accounting for the costs from the point at which expenditure incurred, to
the establishment of its ultimate relationship with cost centers and cost
units. In its widest sense, it embraces the preparation of statistical data, the
application of cost control methods and the ascertainment of the
profitability of activities carried out or planned”.
Cost Accounting = Costing + Cost Reporting + Cost Control.
OBJECTIVES OF COST ACCOUNTING
Recording of costs
Classification of costs
Allocation of costs
Ascertainment of costs
Determining the profits
Determining selling price
Cost control
Cost reduction
Facilitating preparation of financial and other statement
Providing basis for operating policy/Guidance
ELEMENTS OF COST
Element of cost
Materials Labour Expenses
Direct Indirect Direct Indirect Direct Indirect
MATERIAL: The substance from which the
finished product is made is known as material.
(a) DIRECT MATERIAL: is one which can be directly
or easily identified in the product, mostly forming part
of the finished product. Eg: Timber in furniture, Cloth in
dress, etc.
(b) INDIRECT MATERIAL: one which cannot be
easily identified and allocated to a cost centre or
cost. Eg. Glue, tape, lubricant oil etc.
EXAMPLES OF INDIRECT MATERIAL
At factory level – lubricants, oil, consumables,
etc.
At office level – Printing & stationery, Brooms,
Dusters, etc.
At selling & dist. level – Packing materials,
printing & stationery, etc.
LABOUR: The human effort required to
convert the materials into finished
product is called labour.
(a) DIRECT LABOUR: is one which can be conveniently
identified or attributed wholly to a particular job,
product or process.
Eg:wages paid to carpenter, fees paid to tailor,etc.
(b) INDIRECT LABOUR: is one which cannot be
conveniently identified or attributed wholly to a
particular job, product or process.
EXAMPLES OF INDIRECT LABOUR
At factory level – foremen’s salary, works
manager’s salary, gate keeper’s salary,etc
At office level – Accountant’s salary,
GM’s salary, Manager’s salary, etc.
At selling and dist.level – salesmen
salaries, Logistics manager salary, etc.
OTHER EXPENSES: are those expenses other
than materials and labour.
DIRECT EXPENSES: are those expenses
which can be directly allocated to particular
job, process or product. Eg : Excise duty,
royalty, special hire charges,etc.
INDIRECT EXPENSES: are those expenses
which cannot be directly allocated to
particular job, process or product.
Examples of other expenses
At factory level – factory rent, factory insurance,
lighting, etc.
At office level – office rent, office insurance, office
lighting, etc.
At sales & dist.level – advertising, show room
expenses like rent, insurance, etc.
COST CLASSIFICATION – ON THE BASIS
OF
Nature
Function
Behaviour ( Direct & indirect)
Variability
Controllability
Normality
Time
Planning and control
Managerial decision making
ON THE BASIS OF NATURE
Materials
Labour
Expenses
ON THE BASIS OF FUNCTION
Manufacturingcosts
Commercial costs – Administrative and Selling&Dist
Costs
ON THE BASIS OF DIRECT AND INDIRECT
Direct costs
Indirect costs
ON THE BASIS OF VARIABILITY
Fixed costs
Variable costs
Semi variable costs
ON THE BASIS OF CONTROLLABILITY
Controllable costs
Uncontrollable costs
ON THE BASIS OF NORMALITY
Normal costs
Abnormal costs
ON THE BASIS OF TIME:
Historical costs
Pre-determined costs
ON THE BASIS OF PLANNING AND CONTROL:
Budgeted costs
Standard costs
ON THE BASIS OF MANAGERIAL DECISION
MAKING
Marginal costs
Out of pocket costs
Sunk costs
Imputed costs
Opportunity costs
Replacement costs
Avoidable costs
Unavoidable costs
Relevant and irrelevant costs
Differential costs
Calculation of various cost
Direct Materials
Opening stock of materials
Add Purchases of materials
Less Closing stock of materials
(a) Materials consumed
Direct Wages
Direct Expenses ------ ------
PRIME COST
Add Factory Overheads
Factory rent, rates, taxes Fuel-power and water Lighting and Heating Indirect wages Depreciation, Repairs
Salaries of Works Manager etc. Indirect Materials
Drawing office and works office expenses Depreciation on factory land and building Less Scrap value
Defective work
Add Work in progress (opening)
Less Work in progress (closing) ------
WORKS COST
Add Office/Administration overheads
Office rent, insurance, lighting, cleaning
Office salaries, telephone, law and audit expenses
General Manager’s salary
Printing and stationery
Maintenance, repairs, upkeep of office bldg
Bank charges and miscellaneous expenses ------
COST OF PRODUCTION
Add Opening stock of finished goods
Less Closing stock of finished goods ------
COST OF GOODS SOLD
Add Selling and Distribution Overheads
Showroom expenses, salesmen’s salaries
& commission, bad debts, discounts, warehouse rent, carriage outwards, advertising, delivery expenses, samples and free gifts etc.
COST OF SALES
Add Net Profit or deduct net loss: ------ SALES ------
