UGC NET Study Notes on Classification of Costs || Commerce || Management

CLASSIFICATION OF COSTS   

1. Elements

• Direct Material – Refers to the cost of material which can be clearly traced and identified in the product, job, cost centre or cost unit. “The cost of materials entering into and becoming constituent element of a product or saleable service which can be identified separately in produt cost. Eg: timbers in furniture, gold in jewellery, leather in shoes, paper in books, cloth in garments etc.
• Direct Labour – The labour which can be clearly identified to a product, job, cost centre or cost unit. In other words direct labour refers to the wages paid to those workers who are directly employed in the process of manufacturing. Eg ; Wages paid to carpenters, salary paid to teachers in a college, wages paid to tailor in a cloth manufacturing unit, wages paid to gold smith in jewellery etc.
• Direct Expenses –Refers to those expenses which can be clearly identified and traced to a product, job, cost centre or cost unit. Costs other than direct material and direct labour which can be identified in a specific product or saleable service. Eg : Cost of making a model or special design for producing a product, royalty paid for patent rights, hiring, rent paid for specials tools hired, cost of plan in construction of a building etc.
• Prime cost – Refers to the aggregate of direct material, direct labour and other direct expenses.
• Indirect Materials – Are the cost of those materials which cannot be identified to a specific product. Eg :- nails used in furniture, gum used in shoes, polish used in furniture etc.
• Indirect Labor – Refers to that labour which cannot be identified to a specific product. eg: salary paid to helpers, administrative , staff salary, security staff salary, store keepers salary, supervisors, salary, etc.
• Indirect Expenses – Are those expenses which cannot be identified and traced to a product. Eg: factory rent, factory lighting and heating charges, depreciation of factory equipment, insurance charges etc.
• Overheads – Refers to the aggregate of indirect materials, indirect labour and other indirect expenses. In other words overheads or indirect expenses are cost of general nature and are neither identifiable nor traceable to a particular product, job, cost center or cost unit.

1. Variability

• Variable cost – Refers to that part of the total cost which tends to vary directly with variations in the volume of output. In other words variable cost are those expenses which changes in direct proportion to the changes of the activity. Eg: direct labour, direct materials, direct expenses, variable overheads
• Semi Variable cost – Refers to those cost which is partly fixed and partly variable. Eg telephone charges, electricity bill, water charge, etc.
• Fixed cost – Are those costs which remain constant irrespective of the level of activity. Such expenses remain unchanged for all the levels of activity upto the installed capacity. Eg- rent, salary, depreciation, insurance, property tax etc.

1. Traceability

• Direct Cost - Refers to those costs which can be clearly and easily identified with a job, product, cost centre or cost unit. Such costs are also known as prime cost which includes direct material, direct labour and direct other expenses.
• Indirect cost – Refers to those costs which are of general nature and are neither identifiable nor traceable to a product, job, cost centre or cost unit. Such costs are not directly charged to the product, job, cost center or cost unit but allocated to the product job etc.

1. Functions

• Production cost – Refers to the cost incurred by the entity concerned with the manufacturing activity which starts with supply of materials and ends with primary packing of the product.
• Administration cost – Refers to the cost of policy formation and its implementation for attaining the objectives of the organization. In other words administrative cost are those expenses incurred for carrying out the administrative function of the organization.
• Selling and distribution cost

Selling cost – That part of the marketing cost which are incurred in securing orders or creating demand for the product of the organisation. Eg: sales man salary, travelling expenses, sales man commission, brokerage, advertisement, showroom rent etc.

Distribution cost – That part of the marketing cost which starts with warehousing the product and ends with delivery of the product to customers. Such cost is incurred from the completion of production until it reaches the consumer.

Eg: Carriage outwards, Transit insurance, loading charges etc.

1. Controllability

• Controllable cost – Are those costs which can be influenced by the action of a specific member of an undertaking. All direct expenses are controllable and some of the overhead expenses are also Controllable. Basically Controllable expenses comprises of variable expenses.
• Un Controllable cost – Are those cost which cannot be influenced by the action of a specific member of undertaking. Most of the fixed expenses uncontrollable. 

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