COST CLASSIFICATION
COST
Outflow of ECONOMIC RESOURCES for making and selling a product
CLASSIFICATION
Arrangement of things into logical group
 Group of doctors
 Groups of boys
 Groups of girls etc.
COST CLASSIFICATION THROUGH FUNCTION
Function : Any activity performed in business
Finance cost
Research cost
distribution cost
Production cost
Cost
Selling cost
Administration cost
SELLING COST
 Cost of selling product
 Cost of making new customer and retaining existing customer.
Examples
 Bad debt
 Advertisement
 Sales man salary
 Cost of printing price list and
 Sales commission
catalogue
 discount
 Cost of printing slogan on
 After sales services
delivery van
 Market research before  Shop cost (depreciation , Rent)
launching a product.
ADMINISTRATION COST
 Office related cost
Examples





Office guard salary
Office electricity bill
Telephone bill
Phone operator salary
Office furniture’s depreciation





Office building depreciation
Office building Rent
Office building insurance
Office building repairs and maintenance
Auditor /lawyer/accountant salary
Distribution cost
 Cost of distributing product
Example
 Driver salary
 Fuel cost of delivery vehicles
 Road tax
 Delivery vehicle cost
* Repairs
* Maintenance
* Insurance
* Depreciation etc.
Finance cost
 Cost of arranging finances
Example
 Interest
 Store cost (where F/G is
stored)
* Repairs
* Maintenance
* Insurance
* Depreciation etc.
 Secondary packaging
Research cost
 Cost which is incurred prior to the production
 Scientist salary
 Laboratory cost etc.
Production cost
 Cost of producing a product
Elements of production cost
* Materials cost
* Labour cost
* expenses
MATERIAL COST
DIRECT MATERIALS
INDIRECT MATERIALS
 Tangible
 Major part of product
 Economically feasible
 Directly identifiable/ traceable
 Tangible
 Not major part of product
 Not economically feasible
 Not directly identifiable/ traceable
Example
 Wood for table
 Metal for chairs leg
 Flour for cake
 Fabric for shirts
 Leather for shoes
 Brick for building
 Primary packaging
Example
 Staple pins for book
 Gum for shoes
 Nails for chairs
 Buttons for shirt
 Salt for cake
 Baking powder for cake
 Lubricant used In factory
LABOUR TEST
DIRECT LABOUR
INDIRECT LABOUR
 Labour who’s wages are directly
identifiable
 Labour who actually manufacture
product or perform services
 Labour who’s wages are not directly
identifiable
 Labour who do not manufacture product
or perform services but provide help /
assistance in production.
Example
 Doctor for hospital
 Teacher for school
 Carpenter
 Brick layer in construction company
 Auditor for audit firm
 Lawyer for law firm
 Accountant for accounting firm
 Machine operator
 Chef in hotel
Example
 Nurse for hospital
 Supervisor salary
 Factory cleaning staff
 Factory guard
 Teacher assistant
 Store keeper
 Factory manager
Expenses
Direct expenses
Indirect expenses
 Cost which is not direct material
not direct labour but still incurred
specifically incurred for
production.
 Cost which is not indirect material
not indirect labour and not
incurred specifically for
production.
 But these expenses are related to
production.
 Intangible
Example
Example
 Royalty payable
 Designing cost
 Cost of special tool
 Rent
 Insurance
 Repair & maintenance
 Heat and light
 Electricity
 Power cost
 Depreciation
 Factory
 P&M
 Store
(where raw
material is
stored)
COST CLASSIFICATION THROUGH BEHAVIOUR
Fixed cost
 Cost which do not change with the change in activity level.
 Cost which remain constant.
Example
 Rent
 Depreciation straight line basis
 Insurance
 Supervisor salary
Activity level
Total cost
£
Cost per unit
Exam focus
VARIABLE COST
 Cost which DIRECTLY CHANGES with the change in activity level
example
* Direct cost
* Sales commission based on sales volume
* Fuel cost
Exam focus
Activity level
Total cost
£
Cost per unit
SEMI VARIABLE COST
 Cost which is partly fixed and partly variable
 Cost which has element of both fixed and variable cost
Example
Exam focus
TELEPHONE BILL
Activity level
Total cost
£
Cost per unit
STEP FIXED COST
 Cost which is fixed with in a certain level of activity. If activity exceeds that limit
cost will increase and becomes fixed up to another level of activity.
Example
Rent
Supervisor salary
Activity level
Total cost
£
Cost per unit
1) Production cost
Direct material
Direct labour
Direct expense
Indirect material
Indirect labour
Indirect expense
1)
2)
1)
1)
1)
Selling cost
Distribution cost
Administration cost
Finance cost
Research cost
Prime cost
Total Production cost
Production
overheads
Total cost
Non-production
CONVERSION COST
These are the costs of converting purchased raw materials into finished or semifinished products, i.e. production cost excluding direct material cost
Conversion cost = Direct Labour + Direct Expenses + Production Overheads
Conversion cost = Total Production Cost – Direct Material Cost
Cost object : any thing
for which a separate
measurement of cost is
required.
Cost centre : a
production or service
location, function,
activity or item of
equipment where
cost is accumulated.
Cost unit : a unit of
product which has
cost attached to it.