E- MODULE ON ELEMENTS OF COST & COST CLASSIFICATION

SUBMITTED BY

BINOO GUPTA

ASSOCIATE PROFESSOR

PG DEPARTMENT OF COMMERCE AND MANAGEMENT

HMV, JALANDHAR

COST

• It is the amount of resources measured in monetary terms given up in

exchange for some goods and services.

• It includes everything which is sacrificed to produce a particular product

or generate a particular service.

• According t I.C.M.A. London, “ Cost is the amount of expenditure ( actual or

notional) incurred on or attributable to a given thing.”

ELEMENTS OF COST

• Material

• Labour

• Expense

MATERIAL COST

• According to I.C.M.A. London, “ Material Cost is the cost of commodities

other than fixed assets, introduced into products or consumed in the

operation of an organisation.”

• Categories: Direct material cost & indirect material cost

• Examples: timber in furniture making

lubricating oil and cotton waste

LABOUR COST

• It is the cost of the remuneration paid to the employees working in an

organisation whether involved in manufacturing of a product or generating

particular service.

• Categories: Direct Labour Cost & indirect Labour Cost

• Examples: wages paid to carpenter for making furniture

wages of the gatekeeper

EXPENSES

• According to I.C.M.A London, “ Expenses are the cost service provided to

an undertaking and the notional cost of the use of owned assets.”

• It includes all cost other than material and Labour Cost.

• Categories: Direct Expenses & indirect expenses

• Examples: carriage inwards

factory rent and insurance

I. ACCORDING TO NATURE / ELEMENTS

• Material

• Labour

• Expenses

CLASSIFICATION OF COST

II. ACCORDING TO FUNCTION

• Manufacturing cost

• Administration cost

• Selling and distribution cost

• Research and development cost

III. ACCORDING TO VARIABILITY

• Fixed cost

• Variable cost

• Semi-variable cost

Fixed Costs remain fixed irrespective of changes in the production

volume in given period of time. Variable costs change according to

volume of production. Semi-variable costs are partly fixed and

partly variable.

IV. ACCORDING TO CONTROLLABILITY

• Controllable cost

• Uncontrollable cost

Controllable costs are those which can be controlled or

influenced by a conscious management action. Uncontrollable

costs cannot be controlled or influenced by a conscious

management action.

V. ACCORDING TO NORMALITY

• Normal cost

• Abnormal cost

Normal costs arise during routine day-to-day business operations.

Abnormal costs arise because of any abnormal activity or event

not part of routine business operations. E.g. costs arising of

floods, riots, accidents etc.

VI. ACCORDING TO ACCOUNTING PERIOD

• Capital cost

• Revenue cost

VII. ACCORDING TO TIME

• Historical cost

• Pre-determined cost

Historical costs are costs incurred in the past. Predetermined costs

are computed in advance on basis of factors affecting cost

elements. Example: Standard Costs.

VIII. ACCORDING TO TRACEABILITY OR IDENTIFIABILITY TO THE PRODUCT

• Direct cost

• Indirect cost.

Direct costs are assigned to Cost Object. Indirect Costs are not

directly attributable/traceable to Cost Object. Indirect costs are

allocated or apportioned to cost objects.

IX. ACCORDING TO ASSOCIATION WITH PRODUCTION

• Product cost

• Period cost

1.Product Cost is the cost which can be directly assigned to the product. Period Cost is the cost which relates to a particular accounting period.

X. ACCORDING TO RELEVANCY

• Relevant cost

• Irrelevant cost

ACCORDING TO MANAGERIAL DECISION MAKING

• Marginal cost

• Differential cost

• Sunk cost

• Out of pocket cost

• Opportunity cost

• Imputed or Notional cost

• Replacement cost

• Shut down cost

• Urgent cost

• Postponable cost

• Conversion cost

Thanks