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 Production cost
Research cost Cost Selling cost
distribution 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 building depreciation
Office electricity bill Office building Rent
Telephone bill Office building insurance
Phone operator salary Office building repairs and maintenance
Office furniture’s depreciation Auditor /lawyer/accountant salary
Distribution cost
Cost of distributing product
Example
Driver salary Store cost (where F/G is
Fuel cost of delivery vehicles stored)
Road tax * Repairs
Delivery vehicle cost * Maintenance
* Repairs * Insurance
* Maintenance * Depreciation etc.
* Insurance Secondary packaging
* Depreciation etc.
Finance cost
Cost of arranging finances
Example
Interest
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 Tangible
Major part of product Not major part of product
Economically feasible Not economically feasible
Directly identifiable/ traceable Not directly identifiable/ traceable
Example Example
Wood for table Staple pins for book
Metal for chairs leg Gum for shoes
Flour for cake Nails for chairs
Fabric for shirts Buttons for shirt
Leather for shoes Salt for cake
Brick for building Baking powder for cake
Primary packaging Lubricant used In factory
LABOUR TEST
DIRECT LABOUR INDIRECT LABOUR
Labour who’s wages are directly Labour who’s wages are not directly
identifiable identifiable
Labour who actually manufacture Labour who do not manufacture product
product or perform services or perform services but provide help /
assistance in production.
Example Example
Doctor for hospital Nurse for hospital
Teacher for school Supervisor salary
Carpenter Factory cleaning staff
Brick layer in construction company Factory guard
Auditor for audit firm Teacher assistant
Lawyer for law firm Store keeper
Accountant for accounting firm Factory manager
Machine operator
Chef in hotel
Expenses
Direct expenses Indirect expenses
Cost which is not direct material Cost which is not indirect material
not direct labour but still incurred not indirect labour and not
specifically incurred for incurred specifically for
production. production.
But these expenses are related to
production.
Intangible
Example Example
Royalty payable Rent
Designing cost Insurance
Factory
Cost of special tool Repair & maintenance
P&M
Heat and light
Store
Electricity (where raw
Power cost material is
stored)
Depreciation
COST CLASSIFICATION THROUGH BEHAVIOUR
Fixed cost
Cost which do not change with the change in activity level.
Cost which remain constant.
Example
Rent Exam focus
Depreciation straight line basis
Insurance
Supervisor salary
Activity level Total cost Cost per unit
£
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
TELEPHONE BILL Exam focus
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 Prime cost
Direct expense Total Production cost
Indirect material Production
Indirect labour overheads Total cost
Indirect expense
1) Selling cost
2) Distribution cost Non-production
1) Administration cost
1) Finance cost
1) Research cost
CONVERSION COST
These are the costs of converting purchased raw materials into finished or semi-
finished 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, Cost unit : a unit of
activity or item of product which has
equipment where cost attached to it.
cost is accumulated.
