Classification Of Cost

Presented By

B.Karthika I MBA

Escapable Vs Unavoidable costs

Escapable costs are which can be reduced by a contraction in the business activities of a firm.It is called as decremental costs.

Unavoidable costs which cannot be avoided by contraction in the business activity of a firm.It continue to exist irrespective of whether an alternative is chosen or not.

Example:
The Salary of a sales manager remains unaffected even if one or two channels of distribution are discontinued. In the case of escapable cost it is the net effect on the cost that is important,not just the costs directly avoidable by the contraction.

Urgent And Postponable Costs

Urgent costs are those costs which are incurred to keep the continuance of operations of the firm.It is the money spent on materials and labour. Postponable costs can be post-poned temporarily. Example: The cost on maintanance of building can be postponed.Painting and white-washing can be postponed.

Controllable And Non-Controllable

Controllable costs which can be controlled by an executive on whom the responsibilty of cost is vested.It depends on the level of management.The cost which cannot be regulated at the lower level of management may be regarded as controllable at some other level of management.

 Non-Controllable

costs are beyond regulation.These cannot be controlled. Example: Direct material,labour cost-controllable Overhead costs-Non Controllable

Replacement Vs Historical Cost

Replacement costs are those costs of the assets which are computed at the current prices,i.e.,at prices that would have to be paid currently to acquire the same asset.It projects true picture.It is the current cost.The expected cost is the future cost. Historical cost refers to the cost originally paid in order to acquire an asset.It gives poor projection to the management.It is a past cost.

Example:
The original price paid in the purchase of a machinery two years ago might be Rs.10,000.This is historical shown in the balance sheet. A replacement cost now is the cost prevalent in the market. If today the price of the machine is Rs,13,000,its replacement would be 13,000.

Private And Social Cost

Private cost is the cost of producing a commodity by an individual producer. Social costs are the costs which are incurred by the society in the form of resources that are used in order to produce commodities and services. Economic optimum-Private cost Social optimum-Social cost

Short-Run And Long-Run

Short-Run costs are those which are adaptable partially to changes in the rate of output.There is no scope to vary plant,machinery and management.With fixed plant and machinery,cost varies with changes in the rate of output.

 Long-Run costs are those which are

adaptable completely to the changes in the rate of output.There is complete change,as the time is long enough to effect total changes because there is ample scope for changing all input factors.These are the costs which vary completely with changes in rate of output.

In the decision-making,the firm has to decide about changes in input in the immediate future when new plant and machinery cannot be set up. When a firm has to decide about establishing new plant and machinery,longrun costs become relevant.It is also useful in deciding the optimum size of the plant.They are useful for starting a new plant and expanding old ones.

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