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 is also called elements of cost.
There are three types of elements; they are materials, labour and overheads.
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.
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.
###########
Click on the link for YouTube videos |
|
Accounting Equation |
|
Journal Entries in Nepali |
|
Journal Entries |
|
Journal Entry and Ledger |
|
Ledger |
|
Subsidiary Book |
|
Cashbook |
|
Trial Balance and Adjusted Trial Balance |
|
Bank Reconciliation Statement (BRS) |
|
Depreciation |
|
|
|
Click on the link for YouTube videos chapter wise |
|
Financial Accounting and Analysis (All videos) |
|
Accounting Process |
|
Accounting for Long Lived Assets |
|
Analysis of Financial Statement |
###########
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
###########
Click on the link for YouTube videos |
|
Cost Reconciliation Statement |
|
Unit Costing (Output Costing) |
|
|
|
|
|
###########
Classification by Function
According to this classification, costs are classified into three functions.
They are factory cost, administrative cost and selling and distribution 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
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
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
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.
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 |
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 |
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)
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.
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.
Click on the photo for FREE eBooks
BBS Second year eBooks | Business Communication | Cost and Management Accounting | Organizational Behavior | Human Resource Management | Fundamentals of Financial Management
Example of some controllable cost:
Direct materials
Direct labour
Direct overhead
Indirect materials
Indirect labour
Indirect overhead
Power cost
Repairs and maintenance etc
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. |
***** #EPOnlineStudy *****
Thank you for investing your time.
Please comment on the article.
You can help us by sharing this post on your social media platform.
Jay Google, Jay YouTube, Jay Social Media
जय गूगल. जय युट्युब, जय सोशल मीडिया
Comment box closed