CHAPTER 2

COST TERM, CONCEPT &

CLASSIFICATION
Learning objectives:
By the end of the lesson students should be
able to:
1. Define the cost, cost unit and cost centre
2. Identify the cost based on nature(direct
and indirect cost)
3. Classify the behaviour and function cost
Definition
• The application of accounting and costing
principles, method and techniques in
ascertainment of costs and analysis of
saving as compared with previous
experience or with standards – CIMA
• Main objective:
– To determine / ascertain cost
– To pelan and control cost
– To make decision
Basic Costing Principle
COST
~ is the amount of expenditure
incurred on a specific cost
object

COST UNIT
~It is a quantitative unit of product
or service in which costs are
ascertained, e.g. cost per table
made, cost per metre of cloth

TOTAL COST
= Quantity x cost per unit (cost unit)
Classification cost
Direct and indirect cost
function cost
Behaviour cost
 Direct and indirect cost
• Direct cost
~ cost that charged directly to a cost unit. It consists of :
i) Direct material - material which can easily identified and related
with specific product
e.g : furniture - wood, tyres - rubber

ii) Direct labour - main person directly involved in producing

product.
e.g : Making furniture - carpenter, factory labour/worker

iii) Direct expenses -Other than direct material & direct labour
e. g : royalties, fees of special design, carriage inward, hired of
special machine

~ also known PRIME COST

• Indirect cost
~Costs that cannot be charged directly to a cost unit &
relate to the more than one cost unit. It consists of

i) indirect material - nails, glue, varnish

ii)indirect labour - supervisor, manager, cleaners
iii) indirect expenses - utilities, depreciation, rent ,
etc.
~ also known as PRODUCTION OVERHEAD

PRODUCTION COST = PRIME COST + PRODUCTION

OVERHEAD
Function Cost
• cost are classified by function to which they relate
• such costs are :
a) production costs - are costs incurred from the time of acquisition of
material until the transfer of completed items to store. eg : direct material,
direct labour, rent of factory building.

b) period costs - are those costs which are not included in the stock valuation
& as a result treated as expenses in the period in which they are incurred.

c) administration costs - Director's salary, office clerk's salary, rent of office

building, depreciation of furniture & fittings.

d) marketing costs- Selling cost, publicity cost, distribution cost

e) finance costs - bad debts, interest on loan

f) research & development - cost of setting up labs, researcher's salary

Behaviour Cost

•cost that deals with how cost changes with respect to changes in
activity level.
•there are 4 types of cost behaviour :

1. fixed cost
2. Variable cost
3. Semi variable cost
4. Step Costs
FIXED COST
VARIABLE COST
SEMI VARIABLE COST
STEP COST
 Activity
Activity level
level cost per cost per
Behaviour Definition Example
unit (RM) (5000 units) unit (RM)
(2000 units)

- Level of
activity
increase , Depreciation
1)FIXED total cost , rental,
RM 10,000 RM5 RM 10,000 RM 2
COST remain same insurance,
salaries
-cost per unit
changed

-level of
activity
Direct
2) increase,
material,
total cost
VARIABLE Direct
also RM 10,000 RM 5 RM25,000 RM 5
COST increase labour,
salesman
- cost per
commission
unit remain
same

- consists of Telephone
3) SEMI fixed cost + bills,
VARIABLE variable cost salesman RM 20,000 RM10 RM 35,000 RM7
COST - cost per salaries+
unit changed commission
Cost estimation technique
• HIGH & LOW METHOD

STEPS :
~ Choose the highest & lowest activity level
~ identify the costs
~ calculate the variable cost per unit & fixed cost

FORMULA ;
1) variable cost per unit = highest cost-lowest cost
higest unit - lowest unit

2) fixed cost =highest cost - ( highest unit x variable cost per unit)
OR
= lowest cost - ( lowest unit x variable cost per unit)

TOTAL COST = FIXED COST + ( VARIABLE COST PER UNIT X

UNITS)
Example :
Activity Level (units) Total Cost (RM)
1,000 10,000
2,500 13,000
5,000 20,000
5,500 23,500
6,000 25,000

Required :

Calculate the total semi variable cost at activity

level of 4,000 units
FORMULA OF COST STATEMENT
RM RM
Direct material xx
direct labour xx
direct expenses xx
PRIME COST XXX
+ Production overhead
indirect material xx
indirect labour xx
indirect expenses xx
PRODUCTION / FACTORY
XXX
OVERHEAD
TOTAL PRODUCTION /
XXX
FACTORY COST
+ Administration cost xx
+ selling & distribution cost xx
+ Finance cost xx xxx

TOTAL COST XXXX

THAT'S ALL..
THANK YOU