Cost Classification

1. Historical & Future Costs

 Historical cost may be an expired cost or

an unexpired cost.

 Expired cost is the monetary value of the

resources that have already been used in
producing revenue.

 Unexpired cost is the one which still has

a potential of generating revenue in
future. An unexpired cost is an asset.
 Future costs are based on forecasts &
can be planned

 Future costs help to plan ahead &

control activities

 Historical costs are used as starting

point to predict future costs

 Future/predicted costs are called

budgeted or standard costs.
2. Direct & Indirect Costs

 Direct costs are those cost items which

can be traced logically & conveniently, in
their entirety , to a cost object.
 Indirect costs are those cost items which
cannot be traced or identified directly with
a cost object.
 It is not easy to determine the amount of
indirect costs assignable to each cost
object.
 Since indirect costs are common to two or
more cost objects, they are called common
costs
2. Fixed & Variable Costs

 When total cost remains non-variable to

changes in volume, it is called a fixed
cost.

 This cost will remain constant whether

production is zero or 1,00,000 units.

 The total fixed cost remains constant but

the fixed cost per unit varies with volume.
2. Fixed & Variable Costs

 When total cost changes in direct

proportion to changes in volume, it is
called variable cost.

 The variable cost per unit remains

uniform, the total variable cost fluctuates
proportionately to the volume.
3. Budgeted & Standard Costs

 A standard cost is predetermined cost

based on past experience & data

 Standard costs constitute an important

managerial tool of controlling costs &
evaluating performance.
 Budgeted costs
 Budgeted costs are those costs which are
expected to be incurred for the planned
activities of an enterprise for a specified
period of time.

 Budgeted costs are expressed as total

while standard costs are expressed on per
unit basis.

 Those costs for which unit standards

cannot be set are predetermined by
preparing a budget. Eg: fixed factory
overhead
 4. Controllable & Non-Controllable
costs

 Controllable costs are those which can be

influenced to a significant extent by the
actions of an individual at a specific
responsibility level within a specific time
span.

 Those costs which are not subject to the

direct authority & actions of an individual
are Non-controllable at his responsibility
level.
 5. Relevant & Irrelevant costs

 Cost which is influenced by a decision is a

relevant cost & is important for decision-
makers.

 If a company wants to make a component,

the relevant costs are- material & labour
cost, fixed costs to be incurred for creating
additional manufacturing facilities.
 5. Relevant & Irrelevant costs

 Cost which is not affected by a

decision is irrelevant cost.

 Normally, all fixed costs are irrelevant

costs.
 5. Out-of-pocket costs & sunk
costs

 Current/future cash expenditure

required as a result of a decision is an
out-of-pocket cost.

 Those costs which have been incurred

in the past & will not require current
cash expenditure are sunk costs. Eg:
depreciation, preliminary expenses.