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Classification of Costs: 1. by Nature or Elements
Classification of Costs: 1. by Nature or Elements
1. By Nature or Elements.
Direct Material Costs.
Direct Labour Costs.
Factory Over Head Costs. i.e. Factory
supplies ,Lubricants, supervision,
inspection, defective work, Rent,
insurance, depreciation, Maintenance
and Repair, Power , Light and Head,
Prime Cost = Direct Labour + Direct
Material
Conversion Cost = Direct Labour+ FOH
Flat Cost or Total Factory Cost.=
DM+DL+FOH
MBA(UOS) Lecture 2
Classification of Costs
2. By Functions:
Production, Administration, Selling &
Distribution
Production costs. Materials,
Labour, Factory over head.
Administration Expenses: admin *
office Salary, payroll taxes, rent,
depreciation, property tax,
auditing expenses, Legal
expenses, Postage etc.
Selling & Distribution expenses:
Sales Salaries, sales Commission,
advertising, Samples, carriage out
etc.
MBA(UOS) Lecture 2
Classification of Costs
3. Direct & Indirect Costs.
Direct Cost are those which can easily and conveniently be
identified in a unit of cost. Direct Material, Labour & FOH.
4. According to Variability.
Fixed Costs
In Total Remains Fixed.
Per Unit decrease with increase in production.
Control rests with top management.
Assigned by managerial decision.
MBA(UOS) Lecture 2
Classification of Costs
Variable Costs
In Total Increase with production level.
Per Unit remains constant.
Control rests with departmental head.
Can be easily and accurately assigned by
departmental head.
Semi Variable Costs
A Combination of both fixed & Variable.
Not zero even the production is zero.
Increases with increase in production.
MBA(UOS) Lecture 2
Classification of Costs
5. According to Controllability.
Controllable Costs: Which are some how
controllable by management.
Un Controllable Costs: Which are beyond the
control of management.
MBA(UOS) Lecture 2
Classification of Costs
7. Normality.
Normal costs are those which incurred at a
given level of out put.
Abnormal Costs are those which do not incurred
at a given level of out put.
8. Classification by time.
Historical Cost : The costs which are
ascertained after being incurrence.
Predetermined costs. Estimated in advance.
MBA(UOS) Lecture 2
Classification of Costs
9. Product & Period Costs.
Product Costs are those which are directly related with
product.
Period Costs are those which are not directly related
with product and are associated with time period.
10. Classification for managerial Decisions.
Marginal Cost. Is the total of Direct Material, Direct
Labour and Variable Factory over Head.
Differential Cost: Change in costs due to change in
level of output.
Opportunity Cost. The cost of 2nd best alternative.
Replacement Cost. Cost of replacement of an existing
asset or facility.
MBA(UOS) Lecture 2
Classification of Costs
Sunk Cost. Which have already been incurred
and are not relevant for decision making.
Out of Pocket Costs: which involve payment of
cash on the other hand there are expenses like
depreciation etc.
Imputed or notional Costs: which are used for
decision making only like rent of own building
and interest on capital.
Avoidable & Un avoidable Costs. Avoidable cost
are those which can be avoid by eliminating a
department of facility.
MBA(UOS) Lecture 2