Classification of Cost Elements into Variable & Fixed. Management is often required to classify Cost Elements into Variable & Fixed for Contribution Analysis & Other Management Uses.
Main features of Cost Elements either to be classified as Variable Cost Elements or Fixed Cost Elements are as mentioned below :
1) Variable Cost : It remains same per Unit of Production irrespective of Volume of Production or Capacity Utilisation.
It has got linear relationship with Volume of Production
2) Fixed Cost : It totality it remains same for a given period irrespective of Volume of Production or Capacity Utilisation.
However, Cost per Unit of Production decreases with increase in Production Volume and increases with decrease in Production Volume. No Linear Relationship with Volume of Production.
Following should also be kept in view before classifying Cost Elements into Variable or Fixed :
- 1) Direct cost / Prime cost is not the same thing as variable cost.
- 2) Traceability need not be the same thing as Variability.
Cost Elements as mentioned in Annnexure 1 can be classified into Variable & Fixed as mentioned below :
1) Raw Material Cost – It has got linear relationship with Production Volume. Hence it should be treated as Variable Cost.
2) Electricity Purchased from Out Side – Units consumed has relationship with Production Volume though not linear.
Kwh Per MT of Production depends upon Capacity Utilisation.
With respect to Value part, Fixed Demand Charges will be Fixed in Nature but it will be of very negligible value in relation to Total Bill Value.
So, for all practical convenience, Electricity Purchased from Out Side should be treated as Variable Cost
3) Electricity from DG Set – Units consumed has relationship with Production Volume though not linear.
Moreover, as Diesel is a major Cost Element, its Per Kwh Cost should be treated as Variable Cost though it has other Fixed Elements like Direct Employee Cost, Consumable Store, Repairs, Insurance & Depreciation.
4) Steam Units consumed has got linear relationship with Production Volume.
Moreover, as Gas/Coal is a major Cost Element ( may be around 80 % to 85 % of total Steam Cost), Steam Cost should be treated as Variable Cost.
5) Cooling Water – Units consumed has got linear relationship with Production Volume. Moreover, as Electricity is a Major Cost Component ( may be more than 75 % to 80 % of total Cooling Water Cost), it should be treated as Variable Cost.
6) Compressed Air – Units consumed has got linear relationship with Production Volume. Moreover, as Electricity is a Major Cost Component ( may be more than 75 % to 80 % of total Operating Cost), it should be treated as Variable Cost.
7) Natural Gas for Process – It has got a linear relationship with Production Volume. Hence it should be treated as a Variable Cost.
8) Job Work Charges – It has got linear relationship with Production Volume. Hence it should be treated as a Variable Cost.
9) Packing Material Consumed – It has got linear relationship with Quantity of Product Packed. Hence it should be treated as Variable Cost.
10) Consumable Stores – Its incurrence depends upon aging of Plant & Machinery. As It has no linear relationship with Production Volume, it is always advisable to treat it as Fixed Cost although it is neither Variable nor Fixed in nature.
11) Repaires – It is required to keep Plant & Machinery in good condition. As It has no linear relationship with Production Volume, it is always advisable to treat it as Fixed Cost although it is neither Variable nor Fixed in nature.
12) Direct Employee Cost – As it is period cost, it should be treated as Fixed Cost.
13) Insurance – As it is period cost, it should be treated as Fixed Cost.
14) Depreciation – As it is period cost, it should be treated as Fixed Cost.
15) Overheads – As It has no linear relationship with Production Volume, it is always advisable to treat it as Fixed Cost.
| Cost Elements | Traceability to Product | Behaviour | To be classified as variable or fixed |
| Raw Materials | Direct | Variable | Variable |
| Electricity – Out Side Purchases | Direct | Variable | Variable |
| Electricity From Dg Set | Direct | Variable | Variable |
| Steam | Direct | Variable | Variable |
| Cooling Water | Direct | Variable | Variable |
| Compressed Air | Direct | Variable | Variable |
| Natural Gas For Process | Direct | Variable | Variable |
| Job Work Charges | Direct | Variable | Variable |
| Packing Material Consumed | Direct | Variable | Variable |
| Consumable Stores | Direct / Indirect | Semi Variable | Fixed |
| Repaires | Indirect / Indirect | Semi Variable | Fixed |
| Direct Employee Cost | Direct / Indirect | Fixed | Fixed |
| Insurance | Direct / Indirect | Fixed | Fixed |
| Depreciation | Direct / Indirect | Fixed | Fixed |
| Overheads | Indirect | Semi Variable | Fixed |