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clasification of Cost
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Transcript of clasification of Cost
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Cost Accounting
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Cost
Cost is the measurement, in monetary terms, of the amount
of the resources used for the purpose of production of goods
or rendering services.
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3 important factors
Identification of cost centers
Cost unit
Classifying the cost.
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Cost Center
Any unit of cost accounting selected with a view to accumulating
all cost under that unit.
The unit can be product, a service, a department, a division, a
group of plant and machinery, a group of employees.
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Types of Cost Center
May be of two types personal and impersonal cost centers.
Personal cost center consists of person or a group of persons .
Cost centers which are not personal cost centers are Impersonal
cost centers.
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Types of Cost Center
May be further classified as Production cost centers and service
cost centers .
Production cost center are those which are engaged in production
like machine shop, welding shop, assembling shop etc.
Service cost centers are for rendering services to the production
cost centers like power house, maintenance, stores purchase office.
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Industry Cost unit Industry Cost unit
Power MW Steam production Cubic Meter
Cement/steel MT Textile KM
Automobile Number Transport Tonne km/
passenger km
Cost Unit
Cost unit is a form of measurement of volume of production or service.
The unit is generally adopted on the basis of convenience and practice in the
industry concerned.
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Classification of cost
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Basis of classification
Nature of expense.
Relation of cost center traceability.
Functions / activities.
Behaviour wise.
Management decision making.
Production process.
Time period
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Classification by Nature of expense
COST
Material Labour Expenses
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Classification by Nature of expense (Contd.)
Material cost includes cost of procurement.
Freight inward, taxes & duties, insurances etc directly attributable to the
acquisition should be included.
Similarly trade discount, rebates, duty drawback, sales tax refund should be
deducted in determining the cost of material.
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Classification by Nature of expense (Contd.)
Labour cost means the payment made to the employees, permanent or
temporary, for their services
Salaries + wages (both permanent & temporary) + payment to the employees
of contractors.
Include fringe benefit like gratuity, ESI, overtime, bonus, incentive, leave
encashment etc.
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Classification by Nature of expense (Contd.)
Expenses are other than material cost or labour cost which are involved inan activity.
Expenditure on account of utilizes, payment for bought out services, job
processing charges etc. can be termed as expenses.
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Classification by Relation of cost center
If an expenditure an be allocated to a cost center or cost object in an
economically feasible way then it is called direct or otherwise the cost
component is called indirect.
According to this classification material, labour and expenses are divided in
to direct/ indirect material, direct/ indirect labour & direct/indirect
expenses.
All direct costs are called prime cost and indirect costs are known as
overheads
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Classification by Relation of cost center (Contd.)
cost
MATERIAL LABOUR EXPENSES
DIRECT
INDIRECT
DIRECT
INDIRECT
DIRECT
INDIRECT
PRIME
COST
OVERHEADS
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Classification by Relation of cost center (Contd.)
Direct material cost is the cost of material which can be directly allocated
to a cost center or cost object in a economically feasible way.
Direct labour cost is the cost of wages of those workers who are readily
identified or linked with a cost center or cost object.
Direct expenses are those other than direct material or direct labour
which can be identified or linked to a cost center or cost object
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Classification by Relation of cost center (Contd.)
Indirect material cost is the cost of material which can not be directly
allocated to a cost center or cost object.
Ex 1. consumable spares and parts
2. Lubricants for machinary
Indirect labour cost is the cost of wages of those workers who are not
directly allocated to a particular cost center or cost object.Ex 1. Salaries to staff in the administration and accounts department.
2. Salaries to the security staff.
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Classification by Relation of cost center (Contd.)
Indirect expenses are the expenses other than of the nature of material or
labour which can not be directly allocated to a particular cost center.
EX insurance , taxes , duties etc.
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Classification by Functions / Activities
Cost should be classified according to the major function for which
elements are used into the following four major functions :
1. Production;
2. Administration;
3. Research and Development;
4. Selling; and
5. Distribution
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Classification by Functions / Activities (Contd.)
Production Cost is the cost of all items involved in the production of a
product or service.
It includes all the direct costs ( prime cost ) and all indirect costs involved
in the production ( Production Overhead ).
Production Cost = Prime cost ( direct material + direct labour + direct
expenses ) + Production overhead
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Classification by Functions / Activities (Contd.)
Production overhead is also termed as Factory overhead or Manufacturing
overhead.
EX-
Salaries for production planning, technical supervision, factory administration etc.
Expenses for stores management
Security expenses for the factory
Labour welfare expenses
Dispensary and canteen expenses
Depreciation of plant and machinery , repairs and maintenance expenses
Insurance and quality control
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Classification by Functions / Activities (Contd.)
Administration cost are expenses incurred for general management of an
organization. These are in the nature of indirect costs and are also termed
as Administration overhead.EX-
Salaries of administrative and accounts staff.
General Expenses like rent, lighting, rates and taxes, telephone, stationary etc.
Bank charges
Audit fees
Legal expense
Depreciation and repairs and maintenance of office building etc.
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Classification by Functions / Activities (Contd.)
Selling cost are the indirect costs related to the selling of product or service
and include all indirect cost in sales management for the organisation.
EX-
Salaries, commission and travel expenditure of sales personal.
Advertisement cost.
Legal expenses for debt realisation
Market research costRoyalty on sale
After sale service cost
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Classification by Functions / Activities (Contd.)
Distribution cost are the costs incurred in handling a product from the time
it is completed in the works until it reaches the ultimate customer.
EX-
Transport cost.
Cost of warehousing saleable products.
Cost of delivering the products to the customer.
Market research cost
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Classification by Functions / Activities (Contd.)
Notes
1. Primary packing cost is included in the production cost whereas Secondary
packing cost is distribution cost
2.In case of heavy industries equipment supply, installation cost at the delivery site
for heavy equipments which involves assembling of parts, testing etc is included in
the production cost but not in the distribution cost.
3.Installation cost of Gas turbine at plant site is included in the cost of production of
Gas turbine.
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Classification by Functions / Activities (Contd.)
Research and Development Costs are the cost for undertaking research to improvequality of a present product or improve process of manufacture, develop a new
product, market research etc. and commercialization thereof .
Research cost includes cost of development of new product and manufacturing
process; improvement of existing product or process.
Development cost includes the cost incurred for commercialization /
implementation of research findings.
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Direct materials consumed
Direct labour cost
Direct expenses
Prime cost
Add: production overhead
Factory cost
Add: Adminstration overhead
Add: Research and development cost
Cost of Production
Add: Selling & Distribution Cost
Cost of Sales
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Classification by Behaviour
Fixed
Variable
Semi variable
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Classification by Behaviour (Contd.)
Fixed cost is the cost which does not vary with the changes in the productionvolume of activity in the short run.
These costs are not affected by temporary function in activity of an enterprise.
These are also known as period costs.
Ex - salaries, rent, audit fees, depriciation
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Classification by Behaviour (Contd.)
Variable cost is the cost of elements which tends to directly vary with the volumeof activity .
Ex materials consumed, direct labour, sales commission, freight, packing etc.
variable cost has two parts (a) Variable direct costs; (b) Variable indirect costs.Variable indirect costs are termed as variable overheads.
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Classification by Behaviour (Contd.)
Semi variable costs contain both fixed and variable elements.
They are partly affected by the fluctuation in the level of activity
Ex factory supervision, maintenance, power etc.
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Classification by Behaviour (Contd.)
Characteristics of Fixed cost - (1) fixed amount within output of range (2) fixed cost
per unit decreases with increased output.
fixed cost6,00,000
5,00,000
4,00,000
3,00,000
2,00,000
1,00,000
0
fixed cost
0 10,000 20,000 30,000 40,000 50,000 60,000
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Classification by Behaviour (Contd.)
Characteristics of Variable cost - (1) varies with production (2) Variable cost remains
constant per unit within range of activity.variable cost
6,00,000
5,00,000
4,00,000
3,00,000
2,00,000
1,00,000
0
variable cost
0 10,000 20,000 30,000 40,000 50,000 60,000
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Classification by Behaviour (Contd.)
Total cost
12,00,000
10,00,000
8,00,000
6,00,000
4,00,000
2,00,000
0
fixed cost
variable cost
Total cost
0 10000 20000 30000 40000 50000 60000
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Classification for management decision making
Marginal cost
Opportunity cost
Relevant cost
Sunk cost
Abnormal cost
Differential cost
Replacement cost
Imputed cost
Normal cost
Avoidable cost
Unavoidable cost
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Classification for management decision making (contd.)
Marginal cost per unit is the change in the amount at any given volume of output
by which aggregate cost changes if the volume of output is increased or decreasedby one unit.
MARGINAL COST = PRIME COST + VARIABLE OVERHEADS
Differential cost is the change in the cost due to change in the activity from one
level to another.
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Classification for management decision making (contd.)
Opportunity cost is the value of the alternative foregone by adopting a particular
strategy or employing resources in specific manner.
Exa machine is currently used to produce the product p. It can also be used to
produce the product Q which can fetch Rs 60,000 profit . So the opportunity
cost of using the machine is Rs 60,000.
Replacement cost is the cost of an asset in the current market for the purpose of
replacement
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Classification for management decision making (contd.)
Relevant cost are costs relevant for a specific purpose or situation.
Ex depreciated value of a machine is relevant in case of decision of its sale, but is
irrelevant in case of its decision of its replacement.
Impute cost are hypothetical or notional costs, not involving cash outlay
, computed only for the purpose of decision making
Ex Salary or wages of owner or interest on generated fund
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Classification for management decision making (contd.)
Sunk costare historical cost which are incurred i.e. sunk in the past and are not
relevant to the particular decision making problem being considered.
Ex book value of assets
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Classification for management decision making (contd.)
Normal cost is a cost that is normally at a given level of output in the conditions in
which that level of output is achieved.
Abnormal cost is an unusual or a typical cost whose occurrence is usually irregular
and unexpected and due to some abnormal situation of the production.
Ex- idle time for some heavy breakdown or abnormal process loss.
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Classification for management decision making (contd.)
Avoidable cost are those costs which under conditions of performance efficiency
should not have incurred.
Ex when spoilage occurs in the manufacture in excess of normal limit, the
resulting cost of spoilage is avoidable cost.
Unavoidable cost are inescapable costs which are essentially to be occurred,
within the limits or norms provided for. It is fixed in nature and inescapable.
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Classification by nature of production process
Job costing
Contract costing
Process costing
Batch costing
Unit costing
Operating costing
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Classification by nature of production process(contd.)
Job costing
when work performed against individual order from customers .
Ex - printing press, Car repair shop
Batch costing
factories which has to produce large no of parts in order to make the product
undertake production of each part in batches.
Bicycle factory may produce 100000 handles at one time and then take up the
manufacture of other parts
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Classification by nature of production process(contd.)
contract costing
The term applies to the system of costing which relates to the business
concentrating on big contracts only. Very similar to the job costing.A job is a small contract while contract is a big job.
Unit costing
This method applies when there is production of one product only, as in case of
brewery or colliery.
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Classification by nature of production process(contd.)
Process costing
When a product passes through different stages or processes, each having a
bearing on the total cost of production or each yielding valuable by product.Ex in case of oil three distinct processes - crushing, refining, finishing.
Operating costing
followed by business which renders services .
Ex transport industries, hospitals.
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Classification by time
Historical cost
Standard cost
cost
Predeterminedcost
Estimated cost
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Classification by time(contd.)
Historical cost
The actual cost of producing goods or services. These are postmortem costs
and ascertained after incurred.
Pre-determined costs
the predetermined costs are computed in advance of production, on the basis of
specification of all factors affecting cost.
Predetermined cost can be either standard or estimated.