UNIT 2.

ELEMENTS OF COST AND COST

SHEET
CLASSIFICATION OF COSTS
Classification by Nature

Classification in Relation to Cost Centre

Classification by Time

Classification for Decision Making

Classification by Behaviour
COST CLASSIFICATION BY NATURE
 Material Cost: It is the cost of material of any nature
used for the purpose of production of a product or
service.

 Labour Cost: It includes salaries & wages paid to

permanent employees, temporary employees & also to
employees of the contractor.

 Expenses: These are costs other than material cost &

labour cost which are incurred in any activity.
COST CLASSIFICATION IN RELATION TO COST
CENTRE
Total Cost

Direct Costs Indirect Costs

Direct Material Indirect Material

Prime
Cost Direct Labour Indirect Labour Overhead

Indirect
Direct Expenses
Expenses
COST CLASSIFICATION IN RELATION TO COST
CENTRE
 DIRECT COSTS: These costs can be identified easily &
indisputably with a unit of operation or costing unit or cost centre.

 Direct Material: It can be identified easily & indisputably with a unit of

operation or costing unit or cost centre.

 Direct Labour: It is incurred to the employees who are engaged directly

in making the product , their work can be identified clearly in the
process of converting raw material into finished product.

 Direct Expenses: It refers to expenses that are specifically incurred &

charged on specific job, process, service, cost unit or cost centre.
COST CLASSIFICATION IN RELATION TO COST
CENTRE
 INDIRECT COSTS: Indirect costs cannot be allocated but which
can be apportioned to cost centres or cost units. These costs are also
called as ‘common costs’. The indirect cost are not traceable to any
plant, department, operation or to any individual final product .

 Indirect Material: The costs incurred on materials used to further the

manufacturing process which cannot be traced into the end product &
the material required in the production process but not necessarily built
into the product are called ‘indirect material’.
 Indirect labour: The cost of indirect labour consist of all salaries &
wages paid to the staff for the purpose of carrying & tasks incidental to
goods or services provided which will not form part of salaries & wages
paid in working directly upon the product.
 Indirect Expenses: Indirect expenses are those which are incurred by the
organization in carrying out their total business activities & cannot be
conveniently allocated to job process, cost unit or cost centre.
 COST CLASSIFICATION BY TIME
 Historical Cost: It is the actual cost, determined after the event or
price originally paid.

 Predetermined Cost: It is computed in advance of production, on the

basis of a specification of all the factors affecting cost & cost data.

 Standard Cost: It is a predetermined & planned cost for a unit of

product or service based on calculation of how much costs should be
under specified working conditions & correlates with technical
specifications.

 Estimated Cost: It is predetermined cost based on past performance

adjusted to anticipated changes.
 COST CLASSIFICATION FOR DECISION
MAKING
 Marginal Cost: It is 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.

 Differential Cost: It is the difference in total cost that will arise from the
selection of one alternative to the other. It is also known as ‘incremental cost’.

 Opportunity Cost: It is the value of a benefit sacrificed or income foregone by

rejecting best alternative use.

 Relevant Cost: It is a future cost which differs between alternatives & it is

affected by the decision at hand. It is not a historic or sunk cost which has
already been incurred.
 COST CLASSIFICATION FOR DECISION
MAKING
 Sunk Cost: It is the cost for which the expenditure has taken place in the past &
is unaffected by a particular decision.

 Replacement Cost: It is the cost at which material/asset that can be replaced.

 Normal Cost: It is normally incurred at a given level of output in the conditions

in which that level of output is achieved.

 Abnormal Cost: It is an unusual or unexpected cost arise due abnormal

situation of production.

 Avoidable Cost: It will not be incurred if an activity is not undertaken or

discontinued. It is also known as ‘escapable cost’.
 COST CLASSIFICATION FOR DECISION
MAKING
 Unavoidable Cost: It is essentially to be incurred, within the limits or norms
provided for. It is also known as ‘inescapable cost’.

 Pre-production Cost: The costs incurred prior to the starting of the commercial
production are called as ‘pre-production costs’.

 Product Cost: It is an aggregate of costs that are associated with a unit of

product, which may or may not include overheads, depending on type of costing
system.

 Period Cost: It is a cost that tends to be unaffected by changes in the level of

activity during the period of time.

 Traceable Cost: It can be identified easily & indisputably with a unit of operation
or costing unit or cost centre.
 COST CLASSIFICATION FOR DECISION
MAKING
 Common Cost: It cannot be allocated, but which can be apportioned to cost
centre or cost unit.

 Controllable Cost: It is a cost chargeable to a budget or cost centre which can be

influenced or regulated during a given time span by the actions of a particular
individual within an organization.

 Uncontrollable Cost: The uncontrollable cost is a cost that is beyond the control
of a given individual during a given period of time.

 Short-run Cost: It vary with output when fixed plant & capital equipment
remain same.

 Long-term Cost: It vary with output when all input factors including plant &
equipment vary.
 COST CLASSIFICATION FOR DECISION
MAKING
 Past Cost: It is the actual cost incurred in the past& generally contained in the
financial accounts.

 Future Cost: It is expected to be incurred at a later date & it does matter for
managerial decision making.

 Explicit Cost: The explicit cost is a cost that will necessitate a corresponding
outflow of cash.

 Implicit Cost: It is a cost which doesn’t involve any actual cash outlay.

 Book Costs: It will not require any cash outlay e.g. depreciation, notional rent.
 COST CLASSIFICATION FOR DECISION
MAKING
 Shutdown Cost: It is incurred in relation to temporary closing down of a
department/ division & it includes costs of reopening.

 Abandonment Cost: It is incurred for retiring altogether a plant from service or

closing down of the department/ division.

 Urgent Cost: It must be incurred to continue operations of the firm.

 Postponable Cost: It can be shifted to the future with little or no effect on the
efficiency of current operations.

 Conversion Cost: It is the cost incurred to convert raw materials into

finished goods.
COST CLASSIFICATION BY BEHAVIOUR
Total Cost

Variable Semi-Variable
Cost Cost Fixed Cost

Segregation
into
Variable Fixed
Component Component
 COST CLASSIFICATION BY BEHAVIOUR
 Variable Cost: It tends to vary with level of activity within relevant range.
There is a linear relation between volume & variable cost per unit is constant.

 Fixed Cost: It tends to be unaffected by changes in level of activity during a

given period of time. There is an inverse relation between volume & fixed cost.

 Semi-variable Cost: It is neither perfectly variable nor perfectly fixed in

relation to changes in volume. They change in same direction but not in direct
proportion thereto.

 Specific Fixed Cost: It refers to those costs which can be easily identified with
a department, process, product or territory.
 COST CLASSIFICATION BY BEHAVIOUR
 Common Fixed Cost: It refers to those costs which cannot be identified with a
department, process, product or territory.

 Committed Fixed Cost: It refers to the cost that primarily associated with
maintaining the organization's legal & physical existence over which
management has little discretion, & it results from decisions of prior period.

 Discretionary Fixed Cost: It refers to the cost which are influenced by the
managerial decisions.

 Engineered Cost: It relates to the inputs like material, labour & expenses which
are directly connected with the product.
 COST CLASSIFICATION BY BEHAVIOUR
 Managed Cost: It is a cost that stems from current operations but which must
continue to be incurred into the future, its sum level is determined by
management to ensure the continued existence of enterprise.

 Capacity Cost: The cost incurred by a company for providing production,

administration & selling & distribution capabilities in order to enable it to
perform its functions. These costs are normally fixed costs.

 Programmed Cost: It is the cost that is subject to both the management

discretion & management control, but which are unrelated to current activities
& is generally incurred to ensure organization’s long term survival.
 PREPARATION OF COST SHEET

Cost sheet presents the detail information relating to different

stages of cost. It provides us the total cost price to produce the
product during a particular period.

Statement prepared at periodical intervals which accumulates all

elements of cost associated with production.

Cost sheet can be prepared monthly, quarterly or yearly etc.

 OBJECTS OF PREPARING A COST SHEET

 To ascertain the cost price/ total cost, cost per unit of

the product.
 Fixation of selling price after charging the profit.

 Comparing current cost with existing cost per unit for

decision making by management.
 Proper corrective measures and also helps in
management control.
 Framing various policies in relation with production
and other relative areas.
 Preparation of quotation for various tenders.

 Preparation of budgets.
 METHODS OF PREPARATION OF COST
SHEET
 Cost of Direct material= Opening stock of raw materials+Purchases-
purchase return- Closing stock of raw materials.
 Step 1: PRIME COST= Direct material+ Direct Labour+ Direct
Expenses
 Step 2: WORKS COST= Prime cost+ Factory Overheads + opening
stock of work in progress-closing stock of work in progress.
**Factory Overheads=Indirect materials+indirect labour+indirect
expenses.
 Step 3: COST OF PRODUCTION= Works Cost+ Administration/office
Overheads+ opening stock of finished stock- closing stock of finished
stock.
 Step 4: TOTAL COST= Cost of production + Selling and Distribution
overheads
 Step 5: PROFIT=Sales-Total Cost.
 **SPECIMEN OF COST SHEET**
SPECIMEN OF COST SHEET

Cost Sheet for the period:……………………….

Units Produced:………..
   
 

COST PER UNIT TOTAL COST

PARTICULARS

   
COST OF MATERIAL CONSUMED (DIRECT MATERIAL)
xx  
opening stock of raw materials
xx  
Add: Purchases
xx  
Less: Purchase Return
xx  
Less: Closing stock of raw materials.
   
 
xx  
Add: DIRECT LABOUR/WAGES
xx  
Add: DIRECT EXPENSES
   
 
XXX XXX
PRIME COST
 SPECIMEN OF COST SHEET
(CONTINUED….)
XXX XXX
PRIME COST
   
 
   
Add: Indirect /Factory Overheads:-
xx  
indirect wages
xx  
indirect material
xx  
factory rent
xx  
factory lighting
xx  
fuel power
xx  
depreciation/repairs to plant etc..
   
 

xx  

Add: OPENING STOCK OF WORK IN PROGESS

xx  
Less: CLOSING STOCK OF WORK IN PROGESS
XXX XXX
WORKS COST
 SPECIMEN OF COST SHEET (CONTINUED….)

WORKS COST XXX XXX

     

Add: Administrative/ office overheads:-    

office salary xx  

office lighting xx  

office rent and taxes xx  

insurance xx  

legal expenses xx  

postage and telegram xx  

printing and stationery xx  

xx  
Depreciation on office furniture/ office equipments
Management expenses etc.. xx  

     

xx  
Add: OPENING STOCK OF FINISHED GOODS

xx  
Less: CLOSING STOCK OF FINISHED GOODS
     

COST OF PRODUCTION XXX XXX

 SPECIMEN OF COST SHEET (CONTINUED….)

     

COST OF PRODUCTION XXX XXX

     

   
Add: Selling and Distribution Overheads:-

Godown rent xx  

advertisement xx  

showroom charges xx  

carriage outwards xx  

selling on cost xx  

Selling Commission xx  

Travelling salesman salary etc… xx  

     

TOTAL COST/COST OF GOODS SOLD XXXX XXXX

     

ADD: PROFIT XX XX

     

SALES XXXXX XXXXX

   
 
HAPPY LEARNING

END