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Home /  Concept of Cost Accounting
  • 1002 Views
  • Estimated reading time : 54 Minutes
  • Classification of Cost Accounting | By Nature | By Functions | By Behavior | By  Controllability

  • Arjun EP
  • Published on: August 14, 2021

  •  

     

    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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