Cost- cash or cash equivalent value sacrificed for goods and services that are expected

to bring a current or future benefits to the organization.

Expired Cost- Expenses which is deducted in revenue (Cost of Sales or Cost of Goods
Sold)
Classification of Cost

By Function
a. Manufacturing Cost/ Product Cost/ Inventoriable Cost
i. Direct Materials
ii. Direct Labor
iii. Factory Overhead
b. Marketing/ Selling Expenses
c. Administrative Cost
By Variability or Behavior
a. Variable Cost
b. Fixed Cost
c. Mixed Cost (Semi-Variable or Semi-fixed Cost)

By controllability
a. Controllable Cost
b. Non-Controllable Cost
By Normality
a. Normal or Unavoidable Cost
b. Abnormal or avoidable costs

By Element
By Nature
a. Direct Cost
b. Indirect Cost

By Function

d. Production costs
e. Administration costs
f. Selling costs
 g. Distribution costs

By Time

 Historical costs
 Predetermined costs

By Relevance to Decision-Making and Control

Marginal Cost: Marginal cost is defined as “the amount at any given volume of output by which
aggregate costs are changed if the volume of output is increased or decreased by one unit.” 

Marginal cost refers to the increase in total cost that results from an increase in output by one
unit. Marginal cost is denoted by variable cost, and it consists of direct material cost, direct labor
cost, direct expenses, and variable overheads.

Sunk Costs: Sunk costs refer to costs that have already been incurred and cannot be changed by
a future decision. These costs become irrelevant costs for later decisions. 

For example, if a manager decides to replace an existing machine with a new one, the amount
of capital invested in the existing machine (less scrap value) will be irrecoverable and, as a
result, is known as a ‘sunk cost’.

Out-of-pocket Costs: These costs represent the present or future case expenditure regarding
decisions, which vary based on the nature of the decision. Management decisions are directly
affected by such costs because they give rise to cash expenditure. 

For example, consider a firm that has its own fleet for transporting raw materials and finished
goods from one place to another. It seeks to replace these vehicles by employing public carriers. 

In making this decision, the depreciation of the vehicles is not to be considered but the
management must take into account the present expenditure on fuel, maintenance, and driver
salaries. Such costs are treated as out-of-pocket costs.

Opportunity Costs: The opportunity cost of a product or service is measured in terms

of revenue that could have been earned by applying the resources to some other use.
Opportunity cost can be defined as the cost of foregoing the best alternative. 

Thus, the opportunity cost of yarn produced by a composite spinning and weaving mill, which is
used in the weaving section, would be the price that could have been obtained by selling the yarn
in the market.
Imputed Costs: Imputed costs are costs that are not included in costs but are considered for
making management decisions. These costs are hypothetical in character. 

For example, interest on capital, though not actually payable, must often be included to judge
the relative profitability of two products involving unequal outlays of cash.

Differential Costs: Differential costs refer to the difference in total costs between two
alternatives. When choosing an alternative increases total costs, such increased costs are known
as incremental costs. 

On the other hand, if the choice results in a decrease in total costs, such decreased costs are
called decremental costs.

Shut-down Costs: Shut-down costs are costs that will still be incurred when a plant is shut down
temporarily. Sometimes, the normal operations of a business must be suspended temporarily due
to unfavorable market conditions, strikes, or other forces. 

During the suspension of production or other activities, certain costs may still need to be
incurred, and these are considered ‘shut-down costs’. Examples of shut-down costs include rent
for factory premises, salaries of top management, and so on.

Postponable Costs: These are the costs that can be postponed or shifted to the future with little
or no effect on the efficiency of current operations. These costs are postponable but not
avoidable and must be incurred at a later stage. 

The concept of a postponable cost is highly significant in the railway and transport business,
where it’s possible to delay the cost of repairs and maintenance for a certain period. 

In manufacturing, economic crises can also be averted by postponing certain costs. This strategy
was used during the depression period.

Replacement Cost: Replacement cost is the cost of replacing an asset in the current market or at
the current price.

Thus, the replacement cost of an asset is the cost that would be incurred if the asset were
purchased at the current market price and not at the original purchase price.

Abandonment Costs: Abandonment refers to the complete retirement or withdrawal of a fixed

asset from service or use. Fixed assets are abandoned when they are no longer serviceable. 

Abandonment cost refers to the cost incurred in abandoning a fixed asset (i.e., the cost that
cannot be recovered or salvaged from the abandoned asset). It is also known as abandonment
loss.