Cost Accounting & its ClassificationON THE BASIS OF ELEMENT & BEHAVIOR

Presented to:Mr. M. Aslam.

Presented by:M. Sohail Amin

Topic:Cost Acc. & Its Classification

Definition of Cost:

An amount that has to be paid or

given up in order to get something.

Cost Con’d…………

In business, cost is usually a monetary valuation of:

Effort. Material. Resources. Time and utilities consumed. Risks incurred.

Cost Accounting:

Cost accounting is a process of

collecting, analyzing, summarizing

and evaluating various alternative

courses of action.

Cost Accounting Con’d……..

Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability.

Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.

CLASSIFICATION OF COST:

There are different Classification of Cost:

According to Elements According to Behavior.

According to Elements:

There are three types of Cost according to behavior, which are:

MATERIALS COST. LABOUR COST. OVERHEADS.

MATERIALS COST:

Material cost is a Cost which is incurred on Purchase of any type of material used in production.

There are two types of Material Cost:

Direct Materials Cost. Is one which can be identified with and allocated to cost units.” E.g., timber in furniture-making; clay in brick-making; cement, stones, etc., in building.

Indirect Materials Cost. Which cannot be allocated but which can be apportioned to or absorbed by, cost units. For example, power, fuel, repair and maintenance etc.

LABOUR COST:

The Labor Cost is the cost of remuneration (wages, salaries, commissions, bonus, etc.) of the employees of an undertaking.

There are two types of Labor:

Direct Labor Cost. Direct Labor Cost are the cost which can be identified with and allocated to cost units.

Indirect Labor Cost. is one which cannot be allocated but which can be apportioned to, or absorbed by, cost units.” e.g. Wages of indirect labor; Wages of idle time.

OVERHEADS:

Overheads are the aggregate of the cost of indirect material, indirect labor and such other expenses, which cannot be conveniently charged direct to specific cost units.

According to behavior:

There are three types of Cost According to Behavior:

Fixed Cost. Variable Cost. Semi-Variable Cost.

Fixed cost:

It mainly relates to time or period. It remains unchanged irrespective of volume of production like factory rent, insurance, etc. The cost per unit fluctuates according to the production. The cost per unit decreases if production increases and cost per unit increases if the production decreases. That is, the cost per unit is inversely proportional to the production.

Fixed cost Con’d….

For example:

If the factory rent is Rs 25,000 per month and the number of units produced in that month is 25,000, then the cost of rent per unit will be Rs 1 per unit. In case the production increases to 50,000 units, then the cost of rent per unit will be Rs 0.50 per unit.

Variable cost:

Variable cost directly associates with unit. It increases or decreases according to the volume of production.

Variable cost Con’d…….

For example:

Direct material and direct labor are the most common examples of variable cost. It means the variable cost per unit remains constant irrespective of production of units.

Semi-variable cost:

A specific portion of these costs remains fixed and the balance portion is variable, depending on their use.

Semi-variable cost Con’d……..

For example:

If the minimum electricity bill per month is Rs 5,000 for 1000 units and excess consumption, if any, is charged @ Rs 7.50 per unit. In this case, fixed electricity cost is Rs 5,000 and the total cost depends on the consumption of units in excess of 1000 units. Therefore, the cost per unit up to a certain level changes according to the volume of production, and after that, the cost per unit remains constant @ Rs 7.50 per unit.

Attention Plz…………

No Question………