CLASSIFICATION OF COST

Comparing Merchandising and Manufacturing Activities

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

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

Shoppers Stop

Classification Of Cost
1. According To Nature 2. According to function 3. According To Identifiably 4. According To Behavior 5. According Association With Products 6. According to Controllability 7. According To Normality 8. According To Time 9. According To Relevance and 10.Other Costs

Classification Of Cost
1. According To Nature Or Elements

Materials Cost

Labour Cost

Expenses

Cost Elements

Materials

Labour

Expenses

Classification Of Cost
2 According to functions
Production Cost Selling & Distribution Cost

Administration Cost

RD Cost

Classification Of Cost
3 According To Identifiably

Direct

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 Labor Manufacturing Overhead

The Product

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

Example: A radio installed in an automobile

Direct Labor
Those labor costs that can be easily traced to individual units of product.

Example: Wages paid to automobile assembly workers

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

Example: Design Cost Of a car

Classification Of Cost
4 According To Behavior

Fixed

Variable

Semi-Fixed Variable

Cost Classifications for Predicting Cost Behavior

How a cost will react to changes in the level of business activity.

Total variable costs change when activity changes. Total fixed costs remain unchanged when activity changes.

Total Variable Cost

Total Cost of materials depends upon How much materials you use
Total materials bill

Materials used

Variable Cost Per Unit

Per unit materials cost will remain constant

Per Unit Cost

Materials Cost

Total Fixed Cost

Your fixed cost probably does not change when you makeproduction.
Monthly Basic T Bill

Total production

Fixed Cost Per Unit

The average fixed cost per unit decreases as more production is made.
Monthly Basic Bill per unit

production

Cost Classifications for Predicting Cost Behavior

Behavior of Cost (within the relevant range)
Cost Variable In Total Total variable cost changes as activity level changes. Total fixed cost remains the same even when the activity level changes. Per Unit Variable cost per unit remains the same over wide ranges of activity. Fixed cost per unit goes down as activity level goes up.

Fixed

Quick Check
Which of the following costs would be variable with respect to the number of cones sold at a Walls Ice Cream shop? (There may be more than one correct answer.) A. The cost of Rent of the store. B. The wages of the store manager. C. The cost of ice cream. D. The cost of napkins for customers.

Quick Check
Which of the following costs would be variable with respect to the number of cones sold at a Walls Ice Cream Shop? (There may be more than one correct answer.) A. The cost of rent of the store. B. The wages of the store manager. C. The cost of ice cream. D. The cost of napkins for customers.

Quick Check
Which of the following costs would be variable with respect to the number of people who buy a ticket for a show at a movie theater? (There may be more than one correct answer.) A. The cost of hiring the film. B. Royalties on ticket sales. C. Wage and salary costs of theater employees. D. The cost of cleaning up after the show.

Quick Check
with respect to the number of people who buy a The cost of cleaning up MAY also be variable if the theater pays ticket forcrews by the hour. The more tickets sold would cleaning a show at a movie theater? (There increase the time it would correct answer.) may be more than onetake to clean up the theater. A. The cost of hiring the film. B. Royalties on ticket sales. C. Wage and salary costs of theater employees. D. The cost of cleaning up after the show.
The royalties on ticket sales is costs would to the number of Which of the following directly related be variable tickets sold.

Classification Of Cost
5 According to Association With Products

Product Costs

Period Costs

Quick Check
Which of the following costs would be considered a period rather than a product cost in a manufacturing company? A. Manufacturing equipment depreciation. B. Property taxes on corporate headquarters. C. Direct materials costs. D. Electrical costs to light the production facility.

Quick Check
Which of the following costs would be considered a period rather than a product cost in a manufacturing company? A. Manufacturing equipment depreciation. B. Property taxes on corporate headquarters. C. Direct materials costs. D. Electrical costs to light the production facility.

Classification Of Cost

6 According to Controllability

Controllable Costs

Uncontrollable Costs

Classification Of Cost
7 According To Normality

Normal Costs

Abnormal Costs

Classification Of Cost
8 According To Time

Historical Costs

Pre-determined Costs

Classification Of Cost
9 According To Relevance
Opportunity Cost Relevant Cost Sunk Cost Shut Down Cost Differential Cost Imputed Cost Out-Of-Pocket Cost Marginal Cost Replacement Cost

Opportunity Costs
The potential benefit that is given up when one alternative is selected over another.

Example: If you were not attending college, you could be earning Rs.15,000 per year. Your opportunity cost of attending college for one year is Rs.15,000.

Sunk Costs
Sunk costs cannot be changed by any decision. They are not differential costs and should be ignored when making decisions. Example: You bought an automobile that cost Rs.3.5 lacs two years ago. The Rs.3.5 lacs cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the Rs 3.5 Lacs cost.

Quick Check
Suppose that your car could be sold now for Rs2.5 Lacs. Is this a sunk cost? A. Yes, it is a sunk cost. B. No, it is not a sunk cost.

Quick Check
Suppose that your car could be sold now for Rs. 2.5Lacs. Is this a sunk cost? A. Yes, it is a sunk cost. B. No, it is not a sunk cost.

Differential Costs and Revenues

Costs and revenues that differ among alternatives.
Example: You have a job paying Rs.1,500 per month in your hometown. You have a job offer in a neighboring city that pays Rs.2,000 per month. The commuting cost to the city is Rs.300 per month.

Differential revenue is: Rs.2,000 Rs.1,500 = Rs.500 Differential cost is: Rs.300

Quick Check
Suppose you are trying to decide whether to drive or take the train to Mumbai to attend a concert. You have ample cash to do either, but you dont want to waste money needlessly. Is the cost of the pizza you ate last night relevant in this decision? In other words, should the cost of the pizza affect the decision of whether you drive or take the train to Mumbai? A. Yes, the cost of the pizza is relevant. B. No, the cost of the pizza is not relevant.

Quick Check
Suppose you are trying to decide whether to drive or take the train to Mumbai to attend a concert. You have ample cash to do either, but you dont want to waste money needlessly. Is the cost of the pizza you ate last night relevant in this decision? In other words, should the cost of the pizza affect the decision of whether you drive or take the train to Mumbai? A. Yes, the cost of the pizza is relevant. B. No, the cost of the pizza is not relevant.

Quick Check
Suppose you are trying to decide whether to drive or take the train to Mumbai to attend a concert. You have ample cash to do either, but you dont want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Mumbai? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant.

Quick Check
Suppose you are trying to decide whether to drive or take the train to Mumbai to attend a concert. You have ample cash to do either, but you dont want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Mumbai? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant.

Quick Check
Suppose you are trying to decide whether to drive or take the train to Mumbai to attend a concert. You have ample cash to do either, but you dont want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision? A. Yes, the licensing cost is relevant. B. No, the licensing cost is not relevant.

Quick Check
Suppose you are trying to decide whether to drive or take the train to Mumbai to attend a concert. You have ample cash to do either, but you dont want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision? A. Yes, the licensing cost is relevant. B. No, the licensing cost is not relevant.

Quick Check
Suppose you are trying to decide whether to drive or take the train to Mumbai to attend a concert. You have ample cash to do either, but you dont want to waste money needlessly. Is the depreciation on your car relevant in this decision? A. Yes, the depreciation is relevant. B. No, the depreciation is not relevant.

Quick Check
Suppose you are trying to decide whether to drive or take the train Depreciationto attend a to Mumbai that concert. You have a function of miles driven but is ample cash to do either, you dont want to waste money needlessly. Is would be relevant. the depreciation on your car relevant in this decision? Depreciation that A. Yes, the depreciation is relevant. is a function of relevant. B. No, the depreciation is notthe passage of time would not be relevant.

Classification Of Cost
10 Other Costs

Avoidable Costs

Conversion Costs

Unavoidable Costs

TIME FOR QUESTIONS