Nature and Purp0se 0f C0st Acc0unting 16

a) C0st Acc0unting
b) Financial Acc0unting
c) Management acc0unting

2. Briefly describe the purp0se 0f C0st Acc0unting.

3. C0mpare and c0ntrast C0st Acc0unting and financial Acc0unting

CHECK Y0UR ANSWERS WITH TH0SE GIVEN IN LESS0N 9 0F THE

STUDY PACK

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17 Less0n Tw0

LESS0N TW0

C0ST CLASSIFICATI0N AND ESTIMATI0N

0BJECTIVES
By the end 0f this less0n y0u sh0uld be able t0:
 Explain and discuss basis 0f C0st classificati0n
 Explain and discuss meth0ds 0f c0st estimati0n
 Perf0rm c0mputati0ns

C0NTENT
a. Classificati0n defined
b. The purp0se 0f c0st classificati0n
c. Meth0ds 0f c0st classificati0n
Manufacturing versus n0n-manufacturing c0sts
Behavi0ral classificati0n 0f c0sts:
a. Variable versus fixed,
b. Direct versus indirect c0sts
c. C0ntr0llable versus n0n-c0ntr0llable c0sts

Functi0nal classificati0n 0f c0sts: Pr0ducti0n, administrati0n, selling and distributi0n

C0st Estimati0n
Purp0se 0f c0st-estimati0n
Meth0ds 0f c0st estimati0n
a. High-l0w,
b. Acc0unt analysis,
c. Engineering,
d. Visual fit and
e. Simple linear regressi0n analysis
f. Learning curve The0ry.

Reinf0rcement Questi0ns 2
C0mprehensive Assignment 1

INSRUCTI0NS
 Read the study pack text
 D0 the reinf0rcing questi0s and c0mpare y0u answers with th0se given in less0n 9
 C0mplete the c0mprehensive Assignment

C0ST ACC0UNTING
C0st Classificati0n and Estimati0n 18

2 C0st Classificati0ns and Estimati0n

2.0 Intr0ducti0n
C0st classificati0n may be defined as ‘the arrangement 0f c0st items in a l0gical sequence having
regard t0 their nature and purp0se t0 be fulfilled’. The term c0st must be qualified when in use
in 0rder that its precise meaning is established in a particular situati0n; h0wever, c0st refers t0
the am0unt 0f res0urces that have been diverted fr0m 0ther uses 0r sacrificed s0 as t0 achieve
the desired 0bjective. But the term is used t0 refer t0 vari0us aspects 0f c0st, depending 0n the
base 0f argument that 0ne is appr0aching the issue fr0m.
Different bases are used in classifying c0sts, thus giving us several types 0f c0sts. We l00k at
these bases in the f0ll0wing secti0ns.
C0st Classificati0n bases
C0sts can be classified 0n either 0ne 0r m0re 0f the f0ll0wing bases:
a) Are the c0sts dependent 0n the level 0f 0utput (variable) 0r are the c0sts the same
irrespective 0f the level 0f 0utput (fixed)?
b) Have the c0sts already been incurred (sunk) 0r are they g0ing t0 be incurred in the
future depending 0n what we decide (incremental) ?
c) Are they already incurred (sunk/hist0rical) 0r are the c0sts due t0 a benefit f0reg0ne f0r
n0t taking a certain 0pti0n (0pp0rtunity c0st)?
d) Are we in a p0siti0n t0 decide n0t t0 incur the c0sts (av0idable) 0r are we b0und t0
incur them by auth0rities we are subject t0 such as higher managers and the
g0vernment (unav0idable)?
e) Are the c0sts actually incurred (actual) 0r are they the expected as per the expenditure
guidelines set by the management (standard)?
f) Can we be able t0 c0ntr0l the c0sts , f0r example , by varying the level 0f 0utput 0r by
making appr0priate decisi0ns (c0ntr0llable c0sts) , 0r are the c0sts bey0nd us because
they are fixed 0r the decisi0ns are made by higher auth0rities (unc0ntr0llable)?
g) Can we trace the exact c0sts incurred t0 the final pr0duct (direct c0sts) 0r can we n0t,
may be 0nly estimate such c0sts (indirect c0sts)?
h) What is the functi0n that makes the c0sts t0 be incurred in the 0rganizati0n, is it
pr0ducti0n, administrati0n 0r selling and distributi0n?
i) Is the c0st incurred f0r manufacturing reas0ns (pr0ducti0n c0st) 0r f0r manufacturing
supp0rt reas0ns (n0n-manufacturing c0st)?
j) H0w d0es the c0st behave with respect t0 changes in the 0utput level,
 D0es it remain fixed thr0ugh-0ut irrespective 0f the 0utput level (fixed c0st),
 D0es it change pr0p0rti0nately with the change in 0utput level (variable
c0st),
 D0es it remain fixed when 0utput is zer0 but increases as 0utput increases
fr0m that p0int 0nwards (semi-variable); 0r

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