Classification of Cost Accounting | By Nature | By Functions | By Behavior | By  Controllability

 

 

Classification of Cost Accounting

Classification of cost accounting

Classification by nature or elements

Classification by function

Classification by behavior or variability

Classification by controllability

 

Classification by Nature or Elements

Classification by nature is also called elements of cost.

There are three types of elements; they are materials, labour and overheads.

 

(A) MATERIALS

Materials are the most important parts of a manufacturing company.

There are two types of materials.

They are direct materials and indirect materials.

 

Direct materials

It is the main part of finished goods; they are:

Steel, woods and plastic in furniture

Cotton in cloth

Leather, clothes and rubber in shoes

Paper in copy and book

Sugarcane for sugar etc

 

Indirect materials

It is a small part of the quantity of finished goods.

It helps to finish or complete goods; they are:

Sewing thread and buttons in clothe

Enamel, paints, polish and iron peg in furniture

Adhesive, glue and thread in bookbinding etc.

 

 

(B) LABOUR

To convert raw materials into finished goods, manpower is essential.

Such manpower needs expenses.

These expenses are wages, salary, bonus and provident funds etc.

There are two types of labour; they are direct labour and indirect labour.

 

Direct labour

It is the direct cost, labour, wages incurred to produce goods or service providing.

This cost is related to a particular job, process or product; such as:

Wage to tailor for stitching

Wage to carpenter

Wage to mason

Wage to washerman for cleaning the clothes etc

 

Indirect labour

It is the non-productive wage, cost, labour.

It helps to encourage labour to do work hard with honest and sincere; these are:

Allowances

Provident fund

Bonus (extra benefit)

Pension (money for retirement)

Gratuity (money for retirement or appreciation)

Medical facility etc.

 

 

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(C) OVERHEAD  

It is also called direct cost, expenses and overhead.

All the expenses that are not related to direct materials and direct labour are overhead.

There are two types of overhead; they are the direct overhead and indirect overhead.

 

Direct overhead

It is related to the direct production of goods or service rendered; they are:

Import duty

Royalty

Research and development (R&D)

Architect fee etc.

 

Indirect overhead

It is not related to production.

These expenses help to do work easily; they are:

Rent

Telephone, fax, internet, mobile expenses

Taxes

Insurance etc.

 

 

 

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Classification by Function

According to this classification, costs are classified into three functions.

They are factory cost, administrative cost and selling and distribution cost. 

 

 

 

 

Factory, production, manufacturing or work cost

It is the total of prime cost and factory expenses. 

It includes indirect materials, indirect labour, indirect expenses which are incurred inside the workplace where production is carried-on; like:

Factory rent, rates and taxes

Factory telephone and internet expenses

Factory stationery expenses

Lighting, heating, power, fuel, water and coke

Factory wages, salary, pension, provident fund

Canteen, cafeteria expenses, medical expenses and entertainment to labour

Repairs and maintenance, depreciation related to the factory building, furniture and machinery

Other production expenses etc

 

Administrative or office expenses

It is the total of factory expenses and office expenses.

Such as administrative, planning, coordinating, staffing and controlling.

Office overhead includes:

Office rent, rates and taxes

Office lighting, heating and power

Office wages, salary, pension, provident fund

Canteen, cafeteria expenses, medical expenses, entertainment office staffs

Repairs and maintenance, depreciation related to the office building, furniture and equipment

Office stationery, printing, postage expenses

Office telephone, fax, internet expenses

Legal expenses, bank charge, audit fees etc

 

Selling and distribution expenses

These expenses are necessary for sales promotion; it includes:

Advertisement, free sample and charity of goods

Salary, travelling expenses and commission to sales staff and agents

Expenses of the sales department and show-room

Rent, insurance, repairs and maintenance of warehouse or godown

Stationery related to S&D

Telephone, fax, internet expenses related to S&D

Bad debt on credit sales etc

 

 

 

Classification by Behavior or Variability

It is also called classification on the basis of variability.

The relationship between cost and activities is called behaviour.

According to this classification, costs are divided into three groups.

They are fixed cost, variable cost and semi-variable cost.

 

Fixed cost

It is also called capacity cost, periodic cost and burden cost.

These expenses are not changed according to output.

This level is prefixed.

Fixed cost never be a zero.

Generally, it is an uncontrollable and unavoidable cost. 

 

 

Some fixed costs are:

Rent

Depreciation

Salary for permanent staff

Taxes

Insurance etc

 

Note: There is inverse or opposite rule for total fixed cost and fixed cost per unit.

Example: suppose fixed cost for one month is $/₹/Rs 5,00,000 upto 50,000 units

Output in units  (a)	Total fixed cost  (b)	Fixed cost per unit  ( c = b ÷ a)
0	5,00,000	5,00,000 ÷ 0           = ∞
5,000	5,00,000	5,00,000 ÷ 5,000   = 100
20,000	5,00,000	5,00,000 ÷ 20,000 = 25
50,000	5,00,000	5,00,000 ÷ 50,000 = 10

 

 

 

 

Variable cost

It is also called changeable cost, direct cost and running cost.

It is affected according to output or production.

There is a close relationship between total variable cost and volume of output.

When the output is zero, the total variable cost is also zero but the variable cost per unit never is zero.

 

Example: suppose variable cost per unit is $/₹/Rs 6

Output in units  (a)	Variable cost per unit (b)	Total variable cost  (a x b)
0	6	0 x 6            =  0
5,000	6	5,000 x 6    =  30,000
20,000	6	20,000 x 6    =  120,000
50,000	6	50,000 x 6    =  300,000

 

 

 

 

 

Semi-variable cost (mixed cost or semi-fixed cost)

It is the mixed of fixed cost and variable cost.

Neither total amount nor per unit cost of semi-variable cost remains constant.

If the level of production increase, total semi-variable cost decrease but never be zero and vice versa.

 

 

Example:

The electricity bill for household purpose is minimum $/₹/Rs 80 upto 20 units. Afterwards Rs 7.30 per unit upto 199 units then Rs 10 per unit from 200 units.

Units	Basis	Cost per unit	Total cost (semi variable cost )
0	Fixed	Fixed	Rs 80
20	Fixed	Fixed	Rs 80
30	Semi variable	Fixed + Rs 7.30	Rs 80 + 10 units x Rs 7.3               = 80 + 73                    = Rs  153
199	Semi variable	Fixed + Rs 7.30	Rs 80 + 179 units x Rs 7.3            = 80 + 1,306.7              = Rs  1,386.7
200	Semi variable	Fixed + Rs 10	Rs 80 + 180 units x Rs 10             = 80 + 1800               = Rs 1,880

 

Total cost = Fixed cost + (VCPU x Output)

 

 

 

 

 

Classification by Controllability

Under this classification, costs are classified into two groups; controllable cost and uncontrollable cost.

If management can control cost, it is called controllable cost.

If management cannot control, it is called uncontrollable cost.

 

Controllable cost

This type of costs can be controlled by management.

It can be changed or altered by action but time should be long.

If there is a short time, it is difficult to control.

Generally, these are variable cost in nature.

 

 

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Example of some controllable cost:

Direct materials

Direct labour

Direct overhead

Indirect materials

Indirect labour

Indirect overhead

Power cost

Repairs and maintenance etc

 

Uncontrollable cost  

There are some kinds of costs that cannot be controlled by management.

It cannot be changed or altered.

Generally, these are fixed cost in nature.

 

Some uncontrollable costs are:

Rent

Salary to permanent staff

Annual insurance

Management salary etc

 

 

Keep in Mind

Costs are controllable if the manager has strong power to control the amount but the expenses must be variable.

The performance of the manager is evaluated on the basis of controllable cost.

 

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