PAF – Karachi Institute of Economics and Technology City Campus

Course: F5
Faculty: Miss Urooj Istaqlal Date: 27th Jan 2021
Name: Class ID: 106562 Assignment # 2

Name:
Muhammad Adil

Student Id:
63727
 CHAPTER 3
SUMMARY

COST CLASSIFICATION:
Cost classification is the arrangement of cost items into logical groups. For example: by their
nature (materials, wages etc.); or function (administration, production etc.). The aim of costing
is to determine the cost of producing a product/service; for profitability analysis, selling price
determination and stock valuation purposes.

COST UNIT
A cost unit is a unit of product or service in relation to which costs may be ascertained.

DIRECT COSTS
Direct costs are those costs which can be identified with and allocated to a particular cost unit.
TOTAL DIRECT COSTS = PRIME COST

INDIRECT PRODUCTION COSTS (OVERHEADS)

Indirect production costs (known as production overheads) are those costs which are incurred
in the course of making a product/service but which cannot be identified with a particular cost
unit.

TOTAL PRODUCTION COST = PRIME COST + PRODUCTION OVERHEADS

NON-PRODUCTION COSTS
Other costs required to run the business.

TOTAL COSTS = PRODUCTION COSTS + NON-PRODUCTION COSTS

COST BEHAVIOR
It is expected that costs will increase as production increases (i.e. as output increases) but the
exact way in which costs behave with output may differ.
Types of behavior:
(a) Variable cost
(b) Fixed cost
(c) Stepped fixed cost
(d) Semi variable/fixed cost

SEMI-VARIABLE COSTS:
It is necessary to determine the fixed and variable elements of semi-variable costs. A method
known as ‘High-Low’ can be used to establish the fixed and variable elements.

COST CENTRES:
Cost centres are areas where costs are collected e.g. individual departments or individual
machines.

INVESTMENT CENTRES:
This is like a profit centre except that the manager also has the responsibility for new capital
investment (i.e. the purchase of new machines etc.).

PROFIT CENTRES:
Profit centres are where both costs and revenues are collected. Many companies will have
separate divisions and make the divisional manager responsible for the profit of that division.