UNIVERSITY OF BARISHAL

ASSIGNMENT

COURSE TITLE : Management Accounting

COURSE CODE : AIS 4101
TOPIC : Classifications of cost
SUBMITTED TO : Sujan Chandra Paul FCA
Associate Professor,
Department of Accounting and Information Systems
University of Barishal

SUBMITTED BY : Tonmoy Debnath

ROLL : 20 AIS 044
DEPARTMENT : Accounting and Information Systems
SESSION : 2022-23
SEMESTER : First
YEAR : Fourth
DATE OF SUBMISSION : February 18, 2024
Classification may be defined as the process of arranging items into groups according to their
common characteristics or degree of similarity. Cost, in the context of business and economics,
refers to the expenditure or sacrifice incurred to acquire goods, services, resources, or assets.
Cost classification refers to the process of organizing and categorizing costs according to their
nature, behavior, function, or relevance to decision-making. It is an essential aspect of
managerial accounting and financial analysis, providing insights into the composition of
expenses and their impact on business operations.

The following are the different methods of cost classification:

Based on controllability:

1) Controllable costs: Controllable costs are those expenses that a manager or department
head can directly influence or control through their decisions and actions. Examples of
controllable costs include labor costs, material costs, supplies, utilities, and other variable
expenses that can be managed by adjusting resource usage, production methods, or
purchasing decisions.
2) Uncontrollable costs: Uncontrollable costs are expenses that a manager or department
head cannot directly influence or control, at least in the short term. Examples of
uncontrollable costs may include market-driven factors such as raw material prices,
regulatory compliance costs, economic conditions, and fixed costs set at a corporate
level.

Based on time of computation:

1) Historical costs: Historical cost refers to the original cost of an asset as recorded in the
accounting records at the time of its acquisition or purchase. It represents the actual
amount paid or the consideration given to acquire the asset, including all costs necessary
to bring the asset to its intended use.
2) Pre-determined costs: Pre-determined costs refer to estimated or planned costs that are
established in advance of actual production or performance. These costs are
predetermined based on various factors such as historical data, budgetary considerations,
standards, or forecasts. Pre-determined costs are often used for planning, budgeting, and
performance evaluation purposes in managerial accounting and cost management.
Based on normality:

1) Normal costs: Normal costs refer to the standard, expected expenses associated with
producing goods or providing services within a business operation. These costs are
incurred during regular operations and are considered typical or customary for the
industry or business in question.
2) Abnormal costs: Abnormal costs are expenses that deviate from the usual or expected
costs associated with normal business operations. These costs are often unforeseen,
unusual, and non-recurring, and they typically arise from extraordinary events or
circumstances that are outside the control of management.

Based on departments:

1) Production department costs: Production department costs are directly related to the
manufacturing process and the creation of goods or products. These costs are directly
traceable to the production of specific units and are essential for the production process to
take place.
2) Service department costs: Service department costs are not directly tied to the
production process but instead support the overall operation of the organization. These
costs provide essential services or support functions that benefit multiple departments or
the entire organization.

Based on function:

1) Selling costs: Selling costs, distribution costs, research and development costs, and
administration costs are all categories of expenses incurred by businesses in various
aspects of their operations.
2) Distribution costs: Distribution costs are expenses incurred in the storage, handling, and
transportation of goods from the manufacturer to the end consumer or intermediary
distributors.
 3) Research and development costs: Research and development costs are expenses
associated with the creation and innovation of new products, processes, technologies, or
services.

Based on charge to product: 1) product costs. 2) Period costs.

Based on manufacturing process: 1) Prime costs. 2) Conversion costs.

Based on range production: 1) Fixed costs. 2) Variable costs. 3) Mixed costs. 4) Step costs.

Based on element: 1) Material. 2) Labor. 3) Overhead

Based on decision-making:

1) Marginal costs: Marginal costs refer to the additional cost incurred by producing one
more unit of a good or service. It represents the change in total cost resulting from
producing one additional unit of output.
2) Differential costs: Differential costs are the difference in total costs between two
alternative courses of action or decision options. These costs are relevant for decision-
making because they help assess the impact of choosing one option over another.
3) Opportunity costs: Opportunity cost is the value of the next best alternative foregone
when a decision is made to pursue a particular course of action. It represents the benefits
that could have been obtained by choosing an alternative option.
4) Replacement costs: Replacement costs refer to the cost of replacing an asset or resource
at its current market value or the cost of acquiring a substitute asset with similar
functionality or utility.
5) Sunk costs: Sunk costs are costs that have already been incurred and cannot be recovered
or changed regardless of future actions or decisions. Sunk costs are irrelevant for
decision-making because they are unrecoverable.
6) Imputed costs: Imputed costs are costs that do not involve cash expenditures but are
assigned or allocated to reflect the opportunity cost of using internally owned resources,
such as capital, labor, or equipment.
7) Shutdown costs: Shutdown costs are the expenses incurred when a business temporarily
ceases its operations or shuts down a particular segment or production facility. These
costs may include expenses related to severance payments, idle capacity, facility
maintenance, and reactivation costs.