: COST CLASSIFICATION :

Cost classification is the process of grouping costs

according to their common features or characteristics. These are as
follows:
1. Natural Characteristics:-- Raw material, labor/wages,
overhead
2. Changes in the quantity of the actiity:--Fixed cost,
Variable cost !ixed cost "semi fixed, semi variable#
!. "egree of Trace a#ility of the $ro%uct:-- $irect cost,
%ndirect cost,
&. Association 'ith $ro%uct o$eration:--&roduct cost,
&eriod cost.
(. Nature of Function:--&roduction cost, 'dministrative cost,
(elling $istribution cost.
). *elation to Accounting $erio%:--Revenue )xpenditure,
Capital )xpenditure.
+. Ti,e of Cost "eter,ination:-- *istorical cost, &re+
determined cost.
-. Nature of "ata:--)xplicit cost, %mplicit cost,
.. Nature of $ro%uction:--(eparable cost, ,oint cost,
Common cost.
1/.0anage,ent $olicies:--Committed cost, Fixed
$iscretionar-/programmed cost.
11.0anager1s *eleancy of "ecision 0a2ing Analysis:--
.pportunit- cost. Relevant cost, %rrelevant cost, $ifferential cost,
(un/ cost, .ut of poc/et cost, )scapable cost/'voidable cost,
%nescapable/unavoidable cost, Controllable cost, 0on+controllable
cost, (hut+down cost.
12. Other costs: &rime cost, Conversion cost.
1) Fixed cost:---The costs which are not changed with the increase /decrease in the
production. Such as Depreciation on machinery, maintenance of production, managers
salary, factory rent, factory electricity. The fixed costs are totally fixed, but the per unit
fixed cost is decreased with the increase of the production. Such as--
Production
Quantity
Dep. on
machinery
Per unit Machine
Depreciation
1, 1, 1
!, 1, "
", 1, !
1, 1, 1
2).Variable costs:---The costs which are changed with the increase/decrease in of
production, are called #ariable cost. $t always #aries according to the le#el of the
production. The #ariable cost always #aries, but the per unit #ariable cost is fixed. Such
as, wages of the wor%ers.

Production
Pant)
!sed cloth
Meter)
Per unit cloth
Meter)
"otal cloth
cost
per unit
pant
1 1." ! & &
" '." ! 1" &
1 1". ! & &
1 1". ! &, &
#) Mixed cost semi $ariable and semi mixed): --
%. &emi 'ixed cost is also called step cost or ladder cost. (ixed cost remains fixed up to
certain le#el of production. (ixed cost totally fixed, but per unit cost is #ariable. So it is
called Semi fixed cost.
&( )o. o' *or+ers &uper$ision cost
1 1 "
! ! 1,
& & 1",
) ) !,
" " !",
,. &emi $ariable cost is basically changing. Such as*maintenance of +achinery and
repairing cost is semi-#ariable cost. Suppose, maintenance of machinery per month is T,.
1, and per hour repairing charge t% !. So, it is called semi-#ariable cost.
-roduct purchase unit Total cost .T%/. -er unit cost .T%/.
" 1 !.
1 1" 1."
1" !1 1.)
! !0 1.&
!" & 1.!
-. .a* material cost1-2aw materials are used in production process of a product or
ser#ices. The cost of this raw material is called 2aw material cost. 3gain, the cost, which
is related with purchasing or ac4uiring raw material, called material cost. $t is also two
types---
i. Direct raw material. ii. $ndirect raw material
-roduct/$tem Direct r/m $ndirect raw material
1. 5arments .shirts/. 6lothes 6otton, button
!.6lothes Thread, cotton, raw
cotton
6olor, starch
&. 7ute item 7ute 8atching oil
). (urniture 9ood :arnish, screw,
/. (abor cost0*a1es cost1-- The wor%ers wages ; salary which is related with
production , is called labor cost., i.e. the cost of remuneration . Such as wages, salaries,
commissions, bonuses etc. of employees of an underta%ings. $t is also two types1 --- i.
Direct labour. ii. $ndirect labour.
Direct labour $ndirect labour
<mployees salary 6leaner, careta%er wages
<mployees wages, remuneration =ight guard, manager salary
2. 3$erhead cost1--3ll the costs except material and labour related with the product, is
called o#erhead cost. 3ll indirect costs are called o#erhead cost.
$ndirect o#erhead cost
(actory rent, office cost
Depreciation on machinery etc.
4. Production costs:--3ll costs of manufacturing which are incurred in producing a
product are called production costs.
5. 6dministrati$e cost:-3ll costs associated with the general management of the
company as a whole .such as executi#e compensation, executi#e tra#el cost, secretarial
salaries and depreciation of office
8uildings and e4uipment/.
17.&ellin1 and Distribution cost:-3ll costs necessary to secure customer orders and get
the finished product or ser#ice into the hands of the customer.Such as sales commission,
ad#ertising and depreciation of deli#ery e4uipment and finished goods warehouses.
11.Direct cost:-9hich costs are directly related with the production is called direct cost.
Direct costs are three types*Such as >Direct raw material, direct labour and direct
expenses.
i. Direct raw materials are those materials that became an integral part of the
finished product and that can be physically and con#eniently traced it. Such as 9ood is
the direct raw material for the producing table and chair
ii.Direct labour are those labour that can be easily .physically and con#eniently/
traced to the indi#idual units of product.
Direct material ? direct labour@-rime cost.
iii.Direct expenses or costs are those that can be easily and con#eniently trace to
the particular cost obAects. 3ll the costs of manufacturing a product other than direct
materials and direct labour.such as-indirect materials, indirect labour, factory utilities and
depreciation of factory buildings and e4uipment./
Direct labour 8 manu'acturin1 cost9:on$ersion :ost.
12. ;ndirect cost:-9hich costs are not directly related with the production, are called
indirect cost.
$ndirect cost are three types*such as indirect raw material, indirect labour
and o#erhead.
i. $ndirect raw material are those which are not the main element of
production, but they help in production.
ii. $ndirect labor cost are those cost which can not be con#eniently traced
directly to particular products.
1%. .e$enue expenditure:--9hich benefit can be enAoyed for 1 year or less than one
year or is enAoyed in the current year, is called a re#enue expenditure. These exp. are
recurring or repetiti#e in nature. These are shown in the income statement. Such as >
salaries, rent, etc.
1). :apital expenditure:--9hich benefit will be enAoyed in future and hasnt yet used, is
called capital expenditure . These expenditures are non-recurring or non-repetiti#e in
nature. These are shown in the balance sheet as assets. Such as >purchase of machinery,
furniture, etc.
1-. Product cost:--roduct costs include all the costs that are in#ol#ed in ac4uiring or
ma%ing product. $n the case of manufactured goods, these costs consist of direct
materials, direct labour and manufacturing o#erhead. -roduct cost are #iewed as
BattachingC to units of product as the goods are purchased or manufactured and they
remain attached as the goods go into in#entory awaiting sale. So, product cost is assigned
to an in#entory account on the balance sheet. 9hen the goods are sold, the costs are
released from in#entory as expenses .typically called cost of goods sold/ and matched
against sales re#enue. Since product costs are initially assigned to in#entories, they are
also %nown as in#entorial costs.
1/. Period costs: 3ll the costs that are not included in product costs. These costs are
expenses shown in the income statement in the period in which they are incurred, using
the usual rules of accrual accounting you ha#e already learned in financial accounting.
-eriod costs are not included as part of the cost of either purchased or manufactured
goods. Sales, commissions and office rent are good examples of the %ind of costs we are
ta%ing about. =either commissions nor office rent are included as part of the cost of
purchased or manufactured goods. 2ather both the items treated as expenses on the
income statement in the period in which they are incurred. Thus, they are said to be
period costs. 3t last, all selling and administrati#e expenses are considered to be period
costs .
1'. 3pportunity cost:-The potential benefit that is gi#en up when one alternati#e is
selected o#er another .i.e. the maximum #alue of the sacrificed proAects, is called
opportunity cost. (or example1-if a person has a chance of in#esting and if he has a lots
of options, then he has to select only one proAect and he has to sacrifice the others, and
the #alue of the best sacrificed proAect is called opportunity cost.
14. <istorical costs:--9hich costs ha#e incurred already in the past, are called historical
costs. $t is #ery important for financial accounting. $t has some 4ualities, such as* real
obAecti#e, reliable and not biased.
15. Pre-determined costs:-$t is also called standard cost. To plan and control in the
future, there is a need of some standards. 6ontrolling is impossible without standard. So,
what will be the next production cost in future, it is to be determined at first. This pre-
determined cost is called standard costs. Sometimes, the standard cost depends on the
basis of historical cost and the situation of the future plan.
27. =xplicit costs:--The costs which ha#e clear e#idence or documents, is called explicit
costs. 3ll historical costs are called explicit costs. The assets #alue are shown in the
account on the basis of explicit costs. Such as*Salaries, rent, utility, gas, bill, telephone
bill, which ha#e clear bill.
!1. ;mplicit costs:--The costs which ha#e no clear e#idence or documents, is called
implicit cost. Such as- in case of #aluing goodwill, the exact #alue can be determined
approximately.
22. >oint costs:--$f in any production process, if more than one product is produced, the
cost of all products produced is called Aoint cost. Such as*soap and glycerin are
produced in the same production process.
2%. :ommon costs:--$f any asset is used in producing different products, then those
costs are commonly called common cost. Such as1--6omputer, are used commonly in
producing different products.

2,. :ommitted cost:--The cost which will ha#e to be incurred ob#iously for producing
purpose, it is called committed cost. Such as >-urchasing machine, which will ha#e to
purchase, insurance costs, etc.
2-. &hut-do*n cost:-The cost which is related or consistent with the shut down of the
production of any product, is called shutdown cost. i.e. the cost which is incurred though
the production is stopped, such as loss of goodwill, factory rent. <tc.
2/. &un+ cost:-The cost which has already been incurred and which cachanged by any
new decision made now or in the future.
22. =scapable cost:06$oidable cost1-The cost which can be a#oided is called escapable
cost.
24.;nescapable cost0!na$oidable cost:-The cost which can not be a#oided , is called
inescapable cost/una#oidable cost.
25.:ontrollable cost:-The cost which can be controlled, is called controllable cost .i.e.
wastage.
%7.!ncontrollable cost:-The cost which can not be controlled, is called uncontrollable
cost. i.e. accident, fire, natural disaster, cyclone.
%1.&hut-do*n cost:-The cost which is related or consistent with the shut down of the
production of any product, is called shutdown cost. i.e. the cost which is incurred though
the production is stopped, such as loss of goodwill, factory rent. <tc.
%2. Prime cost*Direct materials and direct labor costs are totally called prime cost.
%%. :on$ersion cost*Direct labour and manufacturing o#erhead are totally called
con#ersion cost. Direct labour and o#erhead cost are incurred in the con#ersion of
materials into finished goods. Thats why it is called con#ersion cost.
%,. .ele$ant cost:-3 cost that differs between alternati#es in a particular decision
ma%ing. That means which are rele#ant in decision-ma%ing. 3ll costs are not rele#ant, but
only future costs, which are different in different alternati#es, are called rele#ant cost.
%-. ;rrele$ant cost:-9hich cost are not rele#ant in decision ma%ing , are called irrele#ant
cost. 3ll sun% costs are irrele#ant cost.