CLASSIFICATION OF COST

Comparing Merchandising and Manufacturing Activities

Merchandisers . . .
Buy finished goods. Sell finished goods.

Manufacturers . . .
Buy raw materials. roduce and sell finished goods.

Sho!!ers Sto!

Classification Of Cost
". According To Nature #. According to function $. According To Identifia%ly &. According To Beha'ior (. According Association )ith roducts *. According to Controlla%ility +. According To Normality ,. According To Time -. According To .ele'ance and "/.Other Costs

Classification Of Cost
". According To Nature Or 0lements

Materials Cost

La%our Cost

01!enses

Cost 0lements

Materials

La%our

01!enses

Classification Of Cost
# According to functions
roduction Cost Selling 3 2istri%ution Cost

Administration Cost

.2 Cost

Classification Of Cost
$ According To Identifia%ly

2irect

Indirect

Direct Costs and Indirect Costs

Direct costs
Costs that can be easily and conveniently traced to a unit of product or other cost objective. Examples: direct material and direct labor

Indirect costs
Costs cannot be easily and conveniently traced to a unit of product or other cost object. Example: manufacturing overhead

Manufacturing Costs
Direct Materials Direct abor Manufacturing !verhead

The roduct

Direct Materials
"hose materials that become an integral part of the product and that can be conveniently traced directly to it.

01am!le4 A radio installed in an automo%ile

Direct abor
"hose labor costs that can be easily traced to individual units of product.

01am!le4 )ages !aid to automo%ile assem%ly wor5ers

Direct Expenses
"hose Expenses that can be easily Charged to individual units of product.

01am!le4 2esign Cost Of a car

Classification Of Cost
& According To Beha'ior

Fi1ed

6aria%le

Semi7Fi1ed 6aria%le

Cost Classifications for #redicting Cost $ehavior

%o& a cost &ill react to changes in the level of business activity.

"otal 'aria%le costs change &hen activity changes. "otal fi1ed costs remain unchanged &hen activity changes.

"otal 'ariable Cost

"otal Cost of materials depends upon %o& much materials you use
"otal materials bill

Materials used

'ariable Cost #er (nit

er unit materials cost will remain constant

#er (nit Cost

Materials Cost

"otal )ixed Cost

*our fixed cost probably does not change &hen you ma+eproduction.
Monthly $asic " $ill

"otal production

)ixed Cost #er (nit

"he average fixed cost !er unit decreases as more production is made.
Monthly $asic $ill per unit

production

Cost Classifications for #redicting Cost $ehavior

Beha'ior of Cost 8within the rele'ant range9
Cost 6aria%le In Total Total 'aria%le cost changes as acti'ity le'el changes. Total fi1ed cost remains the same e'en when the acti'ity le'el changes. er :nit 6aria%le cost !er unit remains the same o'er wide ranges of acti'ity. Fi1ed cost !er unit goes down as acti'ity le'el goes u!.

Fi1ed

,uic+ Chec+
-hich of the follo&ing costs &ould be variable &ith respect to the number of cones sold at a -alls Ice Cream shop. /"here may be more than one correct ans&er.0 A. "he cost of 1ent of the store. $. "he &ages of the store manager. C. "he cost of ice cream. D. "he cost of nap+ins for customers.

,uic+ Chec+
-hich of the follo&ing costs &ould be variable &ith respect to the number of cones sold at a -alls Ice Cream 2hop. /"here may be more than one correct ans&er.0 A. "he cost of rent of the store. $. "he &ages of the store manager. C. "he cost of ice cream. D. "he cost of nap+ins for customers.

,uic+ Chec+
-hich of the follo&ing costs &ould be variable &ith respect to the number of people &ho buy a tic+et for a sho& at a movie theater. /"here may be more than one correct ans&er.0 A. "he cost of hiring the film. $. 1oyalties on tic+et sales. C. -age and salary costs of theater employees. D. "he cost of cleaning up after the sho&.

,uic+ Chec+
&ith respect to the number of people &ho buy a The cost of cleaning u! MA; also %e 'aria%le if the theater !ays tic+et forcrews a sho& athour. a movie theater. /"here cleaning %y the The more tic5ets sold would increase the time it would to clean u! the theater. may be more than oneta5e correct ans&er.0 A. "he cost of hiring the film. $. 1oyalties on tic+et sales. C. -age and salary costs of theater employees. D. "he cost of cleaning up after the sho&.
The royalties tic5et sales is costs directly &ould related to the num%er of -hich of on the follo&ing be variable tic5ets sold.

Classification Of Cost
( According to Association )ith roducts

roduct Costs

eriod Costs

,uic+ Chec+
-hich of the follo&ing costs &ould be considered a period rather than a product cost in a manufacturing company. A. Manufacturing e3uipment depreciation. $. #roperty taxes on corporate head3uarters. C. Direct materials costs. D. Electrical costs to light the production facility.

,uic+ Chec+
-hich of the follo&ing costs &ould be considered a period rather than a product cost in a manufacturing company. A. Manufacturing e3uipment depreciation. $. #roperty taxes on corporate head3uarters. C. Direct materials costs. D. Electrical costs to light the production facility.

Classification Of Cost

* According to Controlla%ility

Controlla%le Costs

:ncontrolla%le Costs

Classification Of Cost
+ According To Normality

Normal Costs

A%normal Costs

Classification Of Cost
, According To Time

<istorical Costs

re7determined Costs

Classification Of Cost
- According To .ele'ance
O!!ortunity Cost .ele'ant Cost Sun5 Cost Shut 2own Cost 2ifferential Cost Im!uted Cost Out7Of7 oc5et Cost Marginal Cost .e!lacement Cost

!pportunity Costs
"he potential benefit that is given up &hen one alternative is selected over another.

Example: If you &ere not attending college4 you could be earning 1s.564777 per year. *our opportunity cost of attending college for one year is 1s.564777.

2un+ Costs
2un+ costs cannot be changed by any decision. "hey are not differential costs and should be ignored &hen ma+ing decisions. Example: *ou bought an automobile that cost 1s.8.6 lacs t&o years ago. "he 1s.8.6 lacs cost is sun+ because &hether you drive it4 par+ it4 trade it4 or sell it4 you cannot change the 1s 8.6 acs cost.

,uic+ Chec+
2uppose that your car could be sold no& for 1s9.6 acs. Is this a sun+ cost. A. *es4 it is a sun+ cost. $. :o4 it is not a sun+ cost.

,uic+ Chec+
2uppose that your car could be sold no& for 1s. 9.6 acs. Is this a sun+ cost. A. *es4 it is a sun+ cost. $. :o4 it is not a sun+ cost.

Differential Costs and 1evenues

Costs and revenues that differ among alternatives.
01am!le4 ;ou ha'e a =o% !aying .s.">(// !er month in your hometown. ;ou ha'e a =o% offer in a neigh%oring city that !ays .s.#>/// !er month. The commuting cost to the city is .s.$// !er month.

2ifferential re'enue is4 .s.#>/// ? .s.">(// @ .s.(// 2ifferential cost is4 .s.$//

,uic+ Chec+
2uppose you are trying to decide &hether to drive or ta+e the train to Mumbai to attend a concert. *ou have ample cash to do either4 but you don;t &ant to &aste money needlessly. Is the cost of the pi<<a you ate last night relevant in this decision. In other &ords4 should the cost of the pi<<a affect the decision of &hether you drive or ta+e the train to Mumbai. A. *es4 the cost of the pi<<a is relevant. $. :o4 the cost of the pi<<a is not relevant.

,uic+ Chec+
2uppose you are trying to decide &hether to drive or ta+e the train to Mumbai to attend a concert. *ou have ample cash to do either4 but you don;t &ant to &aste money needlessly. Is the cost of the pi<<a you ate last night relevant in this decision. In other &ords4 should the cost of the pi<<a affect the decision of &hether you drive or ta+e the train to Mumbai. A. *es4 the cost of the pi<<a is relevant. $. :o4 the cost of the pi<<a is not relevant.

,uic+ Chec+
2uppose you are trying to decide &hether to drive or ta+e the train to Mumbai to attend a concert. *ou have ample cash to do either4 but you don;t &ant to &aste money needlessly. Is the cost of the train tic+et relevant in this decision. In other &ords4 should the cost of the train tic+et affect the decision of &hether you drive or ta+e the train to Mumbai. A. *es4 the cost of the train tic+et is relevant. $. :o4 the cost of the train tic+et is not relevant.

,uic+ Chec+
2uppose you are trying to decide &hether to drive or ta+e the train to Mumbai to attend a concert. *ou have ample cash to do either4 but you don;t &ant to &aste money needlessly. Is the cost of the train tic+et relevant in this decision. In other &ords4 should the cost of the train tic+et affect the decision of &hether you drive or ta+e the train to Mumbai. A. *es4 the cost of the train tic+et is relevant. $. :o4 the cost of the train tic+et is not relevant.

,uic+ Chec+
2uppose you are trying to decide &hether to drive or ta+e the train to Mumbai to attend a concert. *ou have ample cash to do either4 but you don;t &ant to &aste money needlessly. Is the annual cost of licensing your car relevant in this decision. A. *es4 the licensing cost is relevant. $. :o4 the licensing cost is not relevant.

,uic+ Chec+
2uppose you are trying to decide &hether to drive or ta+e the train to Mumbai to attend a concert. *ou have ample cash to do either4 but you don;t &ant to &aste money needlessly. Is the annual cost of licensing your car relevant in this decision. A. *es4 the licensing cost is relevant. $. :o4 the licensing cost is not relevant.

,uic+ Chec+
2uppose you are trying to decide &hether to drive or ta+e the train to Mumbai to attend a concert. *ou have ample cash to do either4 but you don;t &ant to &aste money needlessly. Is the depreciation on your car relevant in this decision. A. *es4 the depreciation is relevant. $. :o4 the depreciation is not relevant.

,uic+ Chec+
2uppose you are trying to decide &hether to drive or ta+e the train Depreciation to Mumbai to attend a that concert. *ou have ample cash to do driven either4 but is a function of miles you don;t &ant to &aste money needlessly. Is would be relevant. the depreciation on your car relevant in this decision. Depreciation that is a A. *es4 the depreciation is relevant. function of the passage of $. :o4 the depreciation is not relevant. time would not be relevant.

Classification Of Cost
"/ Other Costs

A'oida%le Costs

Con'ersion Costs

:na'oida%le Costs

TIM0 FO. A:0STIONS