Cost Concepts

Class 2

Learning Objectives
Cost

Methods & Cost Techniques

Costing

Systems/Methods

Cost

Classification

Cost

Sheet

Cost Methods & Cost

Techniques

Cost Methods
1. Job Costing
2. Contract
3. Batch
4.Process( continuous)
5. Service( Operating)

Cost Techniques
1. CVP Analysis
2. Standard Costing
3. Budgetary Control
4. ABC
5. Relevant Costing
6. Target Costing

Costing Systems/Methods
Historical
Absorption
Direct
Marginal
Standard
Uniform

COST CLASSIFICATION

Elements
Behaviour
Functions
Normality
Control
Decision Making

Elements

MATERIAL

LABOUR

EXPENSES

MATERIAL

Direct: traceable to one particular process, job or

product identified with each unit of product
Example: manufacturing an apparel
Cloth, collar, buttons, cufflinks, thread
Primary packing material (e.g., carton, wrapping,
cardboard, boxes, etc.)
Fuel, lubricating oil etc for operating &
maintenance of machine
Small tools
Materials used for repairs & maintenance

LABOUR

Inspectors
Supervisors
Internal transport staff
Storekeeper, maintenance staff

EXPENSES
Expenses leading to a job or contract
Traveling expenses for negotiation
Special pattern, design
Special tools for executing the contract

Rent
Insurance
Canteen, hospital, power , lighting,
maintenance

Behaviour
Fixed

in short run & long run

Variable

Varies with volume and constant per unit

Semi-variable

A cost could be variable for one level of activity whereas it could

be fixed for another.
Not inherently fixed or variable
Many costs are semi-variable in nature

Fixed Cost

Committed Fixed Costs consists largely of those fixed costs

that arise from the possession of planti, equipment and a basic
organizational structure. For example, once a building is
constructed and plant is installed, nothing much can be done
to reduce the costs such as depreciation, property taxes,
insurance and salaries of the key personnel, etc., without
impairing the organization's competence to meet the long-term
goals.
Discretionary Fixed Costs : set at fixed amount, for specific
time periods by the management, in the budgeting process.
These costs directly reflect top management policies and have
no particular relationship with volume of output. These costs
can therefore be reduced or eliminated entirely, if the
circumstances so require. Examples of such costs are: research
and development costs, advertising and sales promotion costs,
donations, management consulting fees, etc. these costs are
also termed as managed or programmed costs.

Functions
Production Cost
Administration Cost
Selling Cost
Distribution Cost

Normality
Normal
Abnormal

Control
Controllable
&
Uncontrollable

Planning & Control

Budgeted Cost: estimate of expenditure

for different business operations

Standard Cost: for prescribed set of

operating conditions, labour, material and
overheads are predetermined; budget
translated into actual operation through
standard costs

Decision Making
Marginal vs. Absorption Costing
(with fixed cost and without FC)
Sunk - irrelevant
Committed pre committed
Opportunity
Incremental / Differential
Avoidable & Unavoidable
controllable / uncontrollable

Relevance
Relevant
Irrelevant

Cont..

Irrelevant cost: not relevant for decision

making
Example: Sunk costs: Sunk cost is the cost of
abandoned plant less salvage value. Not
relevant for decision making.
Imputed (Notional cost): Actually not
incurred (interest on own capital, rent on
owned building, etc.) Taken into account in
capital budgeting decisions.
Replacement cost: Cost of replacing at
current market price.

Cont..

Avoidable and unavoidable cost:

Cost that can be avoided by eliminating
a product or department is avoidable
and
that
which
cannot
be,
is
unavoidable.
Ex. Rent of factory is unavoidable if a
product is discontinued.

Other costs:

Future costs: cost to be incurred in future

Programmed cost: Cost incurred as per policy of
top management. Ex.- Donation to charity.
Joint cost: cost of joint or by-products incurred
before separation, which cannot be traced to
particular products.
Conversion cost: cost of converting raw material
to finished goods = Production cost- direct material.
Discretionary cost: not essential for decision on
hand. Ex.- Training expenses of workers, R&D cost.
Committed cost: Costs incurred due to past
decisions and are not within control in the short run
at present. Ex.- Depreciation on Plant, Rent, etc.

INVENTORIABLE COSTS AND PERIOD

COSTS

Inventoriable cost/ product cost is that cost which

is regarded as asset when incurred, but becomes
a part of cost of goods sold when the product is
sold. For MUL, all manufacturing cost is
inventoriable cost. (Raw material to WIP to
Finished goods) For a service sector unit, absence
of inventory means all are period costs.

Period costs (non-product cost): all costs in P&L

account except cost of goods sold. So, in a mfg.
sector unit, all non-manufacturing costs are
period costs. (Ex. Distribution cost, design cost,
R&D costs, Marketing costs, customer-service
costs, etc.)