Costing – Classification of Various Costs, Types of cost
Costing – Classification of Various Costs, Types of cost: As the cost varies with purpose to purpose and also the same cost data cannot serve all the purposes equally well, so we classify costs into various types. It is advisable to use the word ‘Cost’ with an adjective or a phrase, so that the intended meaning is conveyed.“
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The various types of costs can be classified as follows:
On the Basis of Traceability
Direct cost is a cost, which can be economically identified with a specific saleable cost unit. The term ‘direct’ indicates that elements of costs which are traceable to a particular unit of output.
Indirect cost is the cost, which cannot be directly identified to a particular unit of output or to the segment of a business operation.
On the Basis of Behaviour
Period cost / Fixed cost/ Fixed overhead
It is a cost which is incurred for a period, and which, within certain output and turnover limits, tends to be unaffected by fluctuations in the levels of activity. Examples: rent, rates, insurance, etc.
It is the cost, which tends to vary with the level of activity.
Semi Variable Cost
It is the cost, which changes with the change in activity but doesn’t change, in the same proportion. The semi variable cost is further segregated (divided) into fixed cost and variable cost by following certain methods.
On the Basis of Element Wise
It is the cost of basic raw materials, components, consumables, spares, packing material, etc. are used to make a product. It is a major proportion of costs of manufactured items.
It means the payment of expenses in the name of salaries, wages, bonus, benefits, staff welfare, etc.
Prime cost is the aggregate of direct material cost and direct labour cost. (The term direct expenses have been excluded from prime cost as per latest CIMA terminology).
The sum of direct wages, direct expenses & Overhead cost of converting raw material to the finished stage or converting a material from one stage of production to other.
On the Basis of Function Wise
It represents prime cost plus absorbed production overhead.
Costs incurred for carrying overall administration of the entity.
Selling and Distribution Cost
Post-Production costs incurred to advertise the product to public and to sell the same. They include the cost of getting the goods distributed to the customers. Eg. Carriage Outwards, Salesman Commission.
Research & Development Cost
These are the costs incurred on innovation and inventions of new processes, products and technologies. Normally they are not charged to cost units. Cost of unsuccessful projects are written off to Costing P&L A/c.
On the Basis of Averaging
When the costs are calculated in aggregate for all the units produced, they are total costs.
If the total cost is divided by the number of units on which such costs is incurred, we get the cost per unit of product or service. Such unit cost can also be taken out element wise, depending on the need of the enterprise.
On the Basis of Assets or Expenses
Product cost is cost of a finished product built up from its cost element. Such costs are assigned to the product and are included in inventory valuation.
Period costs are those costs which can be assigned against particular product but charged as expenses against the revenue of the period in which they are incurred. For example administrative overhead, selling and distribution overhead etc.
On the Basis of Production Process
These are costs assigned to a particular job or work of non-standardized nature, which is calculated for each job. Eg. Cost of Construction of a Building, Costs in a Vehicle Service Shop assigned to specific vehicles.
In industries where a systematic procedure is followed for production of goods, process costs are calculated for each level of activity and assigned over all the units processed in that process. The output of one process becomes input for the next. The cost cannot be ascertained with each specific item produced.
In case of industries having large number of homogenous items produced, operation cost is ascertained for each operation. It is a variant of process cost.
Service Cost/Operating Cost
It is the cost of operating and running a service like transport, hotel, education, etc. The output is measured in units such as tonne Km, and cost is ascertained for each such unit.
On the Basis of Decision Making
Relevant cost helps in specific management decision making. business decisions involve planning for future and consideration of various alternative courses of action. In the planning process the costs which are affected by the decisions are future costs. Such future costs are called relevant cost because they are pertinent to the decisions in hand. Relevant cost is a future cost which causes the difference between alternatives.
Opportunity cost refers to the value of sacrifice made or benefit of opportunity foregone in accepting alternative course of action.
It is derived by deducting the desired amount of profit from the estimated selling price. All efforts are made to keep the total cost within the limit of the target cost.
Standard cost is a scientifically per-determined cost, which is arrived at assuming a particular level of efficiency in utilisation of material, labour and indirect services. In this method actual costs incurred are compared with standard cost and reasons for difference or variations are found out so that management may take remedial measures to control the costs.
It is the cost of providing one additional unit of the product. With increase in production, the fixed costs do not rise, but the difference in production cost is due to variable cost, which is termed as marginal cost.
Budgeted/ Estimated Cost
Estimated cost is an approximate assessment of what the cost will be. It is based on past averages adjusted to anticipated future changes. Estimated costs are used for the evaluation of performance by comparison with the actual but are less accurate than the standard costs.
Historical cost or ‘post-mortem’ costs which are collected after they have been incurred. These costs report past events and the time lag between event and its reporting makes the information out-of-date and irrelevant for decision-making.
Future costs are costs expected to be incurred at a later date.
Replacement cost is the cost of replacement in the current market.
These are actual costs incurred which involve some payment to outsiders either in advance, or simultaneously or later. They are recorded in books of accounts.
A chargeable cost is an expense which is specifically incurred in connection with the execution of a particular job or work order. It includes all direct expenses other than those of direct material and direct labour. It forms a part of prime cost of the product.
On the Basis of Controllability
The term controllable refers to costs which can be influenced by the action of the executive in undertaking and is capable of control. Direct costs comprising direct labour, direct material, direct expenses and some of the overheads are generally controllable by the middle level management.
Cost which cannot be influenced by the action of a special member of undertaking and is beyond control is known as uncontrollable cost. For example, fixed expenses like salary, rent, insurance and taxes.