CONCEPT AND CLASSIFICATION

OF COSTS

By Purna Narayan
Maharjan
Lecturer
Public Youth
Campus
 CONCEPT OF COST

The amount of expenditure that are

incurred for a specific activity like
producing the product and providing the
service.
 Purpose of the cost
•To determine the selling price of the
products.
•To reduce the cost or control the cost
•For example,

A Company B Company
Direct material 12 if 10 10
Direct labour 8 10
Other direct expenses 5 5
Total cost 25 23 25
Selling price 30 30
Profit 5 7 5
 CLASSIFICATION OF COST

Direct cost (Prime cost)

• Expenditure which are directly related

to producing goods and providing
services. Such as direct material,
direct labour and other direct
expenses.
 For example, If you make the shorts or
Tables
Resources Shorts Tables
Direct material Clothes woods
Direct labour Amount paid to Amount paid to
tailors carpenter
Other direct Faison designer Interior fees
expenses fees

Expenditures other than direct material and direct labour is known as other
direct expenditure.
Indirect cost or Overhead

• Expenditure which are indirectly

related to producing goods and
providing services.
 CLASSIFICATION OF INDIRECT COST

•Function
•Element/ Nature
•Behaviour
•Controllability
•Decision Making
 FUNCTION

•Factory Cost

•Administrative Cost

•Selling and Distribution Cost

•Research and Development Cost

 ELEMENT/NATURE

Indirect Material
Indirect Labour
Indirect expenses
 BEHAVIOUR
Fixed Cost
Variable Cost
Mixed Cost
(Semi-variable /Semi-fixed cost)
 CONTROLLABILITY

Controllable

Uncontrollable
 Decision Making
Relevant Cost
Irrelevant Cost
Opportunity Cost (sacrifice of benefit)
Normal capacity=10000units (100%)
Production units= 8000 (80%)
2000
Offer = 3000
1000X Rs.10(CM)
= Rs.10000 (opportunity cost)
TYPES OF COSTS BY BEHAVIOR
Cost behavior refers to the relationship
between total costs and activity level.
Based on behavior, costs are categorized
as either fixed, variable or mixed.
 VARIABLE COSTS
The cost which can be changed in direct
proportion to the level of output, is known as
variable cost. This means that total variable
cost increase when more units are produced
and decreases when less units are produced.
Direct material, direct labour, other direct expenses, variable
manufacturing expenses and variable selling and distribution expenses
are the examples of variable cost.
 For example
Level of Total Variable Cost per
Outputs Cost Unit
0 0 5
10 50 5
20 100 5
30 150 5
40 200 5
 FEATURES OR NATURE OF
VARIABLE COST
• Per unit cost are constant in different level
of out put.
• Total cost are changed proportionately in
different level of output.
• If level of activity is zero, the total cost will
be zero. So it is controllable.
 FIXED COSTS
Fixed costs are those cost which do not
change with the level of output within
the relevant range. These costs will be
incurred even if no units are produced.
For example rent and taxes, salary,
straight-line depreciation expense, etc.
Fixed cost per unit decreases with
increase in output.
 For example
Level of Total fixed Cost Cost per
Outputs Unit
0 10,000 -
10 10,000 1000
20 10,000 500
30 10,000 333.33
40 10,000 250
 FEATURES OR NATURE OF FIXED
COST
• Per unit cost are decreases with increase in
output.
• Total cost are constant in different level of
output.
• If level of activity is zero, the total cost will
be constant. So it is uncontrollable.
 MIXED COSTS
Mixed costs are those cost which contain both
fixed and variable cost. These costs will be
incurred even if no units are produced. For
example telephone bills, electricity bills,
delivery cost which has a fixed component of
depreciation cost of delivery van and a
variable component of fuel expense.
 For example
Level of Total mixed Cost per
Outputs Cost Unit
0 300 -
5 600 120
10 900 90
15 1200 80
20 1500 75
MIXED COST
 FEATURES OR NATURE OF MIXED
COST
• Per unit cost are changed in different level of
output.
• Total cost are changed in different level of
output but not proportionately.
• If level of activity is zero, the total cost will
be constant.
 Cost Segregation
The process of separating the mixed cost into
variable cost and fixed cost is known as cost
segregation. The mixed cost can be segregated
because of cost estimation for different level of
activities.
Method of cost segregation:
• High-Low method or Two point method
• Least square method or Statistical method
 Basic formula for High-Low Method

Total estimated cost = Total fixed cost + Unit variable cost X Level of output
Y = a + bX
 Basic formula for Least square Method

Where,
b = Variable cost per unit
a = fixed cost
X = Production Units
Y = Total cost of production 0r Mixed cost
N = Number of items
Problems
 Solution a.
Items Types of 1000 2000
cost
Rate Cost Rate Cost
Indirect labour Variable 10 10000 10 20000

Indirect material Variable 21 21000 21 42000

Supervision Mixed 12 12000 7 14000

Power Mixed 9 9000 6.5 13000

Depreciation Fixed 25 25000 12.5 25000

Rent Fixed 15 15000 7.5 15000

Total 92000 129000
b. Segregation of mixed cost in to variable and fixed cost

For Supervision cost

𝐻𝑖𝑔ℎ 𝑐𝑜𝑠𝑡 −𝐿𝑜𝑤 𝑐𝑜𝑠𝑡 14000−12000 2000
Unit variable cost (b) = = =
𝐻𝑖𝑔ℎ 𝑢𝑛𝑖𝑡 −𝐿𝑜𝑤 𝑢𝑛𝑖𝑡𝑠 2000−1000 1000
=Rs.2
Fixed cost (a) = Total cost – unit variable cost x level of out put
= y - bx
= 14000-2x 2000 = 14000- 4000 = Rs.10000

For Power cost

𝐻𝑖𝑔ℎ 𝑐𝑜𝑠𝑡 −𝐿𝑜𝑤 𝑐𝑜𝑠𝑡 13000−9000 4000
Unit variable cost (b) = = =
𝐻𝑖𝑔ℎ 𝑢𝑛𝑖𝑡 −𝐿𝑜𝑤 𝑢𝑛𝑖𝑡𝑠 2000−1000 1000
=Rs.4
Fixed cost (a) = Total cost – unit variable cost x level of out put
= y - bx
= 9000-4x 1000 = 9000- 4000 = 5000
c. Total variable cost per unit = Indirect material +
Indirect labour + Supervision+ Power
= 10+21+2+4 = Rs.37

d. Total Fixed cost = Supervision + Power+ Depreciation

+ rent = 1000 + 5000 + 25000
+ 15000 = Rs.55000
e. Total cost for 3000 units
Total cost = total fixed cost +Total variable cost
Y = a + bx
Rs.55000 + Rs.37 x 3000
Rs.55000 + Rs.111000
Rs. 166000
Short way
Total unit variable cost
𝐻𝑖𝑔ℎ 𝑐𝑜𝑠𝑡 −𝐿𝑜𝑤 𝑐𝑜𝑠𝑡
Unit variable cost (b) =
𝐻𝑖𝑔ℎ 𝑢𝑛𝑖𝑡 −𝐿𝑜𝑤 𝑢𝑛𝑖𝑡𝑠
129000−92000 37000
= =
2000−1000 1000
=Rs.37
Total fixed cost
Fixed cost (a) = Total cost – unit variable cost x level of out put
= y - bx
= 129000- 37 x 2000 = 129000- 74000 = Rs.55000
e. Total cost for 3000 units
Total cost = total fixed cost +Total variable cost
Y = a + bx
Rs.55000 + Rs.37 x 3000
Rs.55000 + Rs.111000
Rs. 166000
Items Types of 1000 2000
cost
Rate Cost Rate Cost
Indirect labour Variable 10 10000 10 20000

Indirect material Variable 21 21000 21 42000

Supervision Mixed 12 12000 7 14000

Power Mixed 9 9000 6.5 13000

Depreciation Fixed 25 25000 12.5 25000

Rent Fixed 15 15000 7.5 15000

Total 92000 129000
b. Segregation of mixed cost in to variable and fixed cost
For Supervision cost
Unit variable cost (b) = = =
=Rs.2
Fixed cost (a) = Total cost – unit variable cost x level of out put
= y - bx
= 14000-2x 2000 = 14000- 4000 = Rs.10000
For Power cost
Unit variable cost (b) = = =
=Rs.4
Fixed cost (a) = Total cost – unit variable cost x level of out put
= y - bx
= 9000-4x 1000 = 9000- 4000 = 5000
c. Total variable cost per unit = Indirect material +
Indirect labour + Supervision+ Power
= 10+21+2+4 = Rs.37

d. Total Fixed cost = Supervision + Power+ Depreciation

+ rent = 1000 + 5000 + 25000
+ 15000 = Rs.55000
e. Total cost for 3000 units
Total cost = total fixed cost +Total variable cost
Y = a + bx
Rs.55000 + Rs.37 x 3000
Rs.55000 + Rs.111000
Rs. 166000
 Short way
Total unit variable cost
Unit variable cost (b) =

= =
=Rs.37
Total fixed cost
Fixed cost (a) = Total cost – unit variable cost x level of out put
= y - bx
= 129000- 37 x 2000 = 129000- 74000 = Rs.55000
e. Total cost for 3000 units
Total cost = total fixed cost +Total variable cost
Y = a + bx
Rs.55000 + Rs.37 x 3000
Rs.55000 + Rs.111000
Rs. 166000
 Solution, By using least square method
Days Output Cost XY 𝑿2
(X/100) (Y/100)
Sunday 1 21 21 1
Monday 2 22 44 4
Tuesday 3 23 69 9
Wednesday 4 24 96 16
Thursday 6 26 156 36
Friday 9 29 261 81

∑𝑋 =25 ∑𝑌 =145 ∑𝑋𝑌 =647 ∑𝑥 2 =147

 𝑵∑𝑿𝒀−∑𝑿∑𝒀 𝟔𝑿𝟔𝟒𝟕−𝟐𝟓𝑿𝟏𝟒𝟓
Unit variable cost (b) = 𝟐 =
𝑵∑𝒙 − ( ∑𝑿)𝟐 𝟔𝑿𝟏𝟒𝟕− ( 𝟐𝟓)𝟐

𝟑𝟖𝟖𝟐−𝟑𝟔𝟐𝟓 𝟐𝟓𝟕
= = = Rs.1
𝟖𝟖𝟐−𝟔𝟐𝟓 𝟐𝟓𝟕

∑𝒀−𝒃∑𝑿 𝟏𝟒𝟓−𝟏𝑿𝟐𝟓
Fixed cost (a) = = X100
𝑵 𝟔

𝟏𝟐𝟎𝟎𝟎
= =Rs.2000
𝟔

Estimate d cost for 1500 units

Total cost = total fixed cost +Total variable cost
Y = a + bx
Rs.2000 + Rs.1 x 1500
Rs.2000 + Rs.1500
Rs. 3500
 Solution, By using least square method

Days Output Cost XY

(X/100) (Y/100)
Sunday 1 21 21 1
Monday 2 22 44 4
Tuesday 3 23 69 9
Wednesday 4 24 96 16
Thursday 6 26 156 36
Friday 9 29 261 81

25 145 647 147

Unit variable cost (b) = =

= = = Rs.1

Fixed cost (a) = = X100

= =Rs.2000

Estimate d cost for 1500 units

Total cost = total fixed cost +Total variable cost
Y = a + bx
Rs.2000 + Rs.1 x 1500
Rs.2000 + Rs.1500
Rs. 3500
5
 Solution, By using least square method
Months Output Cost XY 𝑿2
(X/100) (Y/100)
Baishak 2 15 30 4
Jestha 4 23 92 16
Ashadh 6 31 186 36
Shrawan 8 39 312 64
Bhadra 10 47 470 100

∑𝑋 =30 ∑𝑌 =155 ∑𝑋𝑌=1090 ∑𝑥 2 =220

 𝑵∑𝑿𝒀−∑𝑿∑𝒀 𝟓𝑿𝟏𝟎𝟗𝟎−𝟑𝟎𝑿𝟏𝟓𝟓
Unit variable cost (b) = 𝟐 =
𝑵∑𝒙 − ( ∑𝑿)𝟐 𝟓𝑿𝟐𝟐𝟎− ( 𝟑𝟎)𝟐

𝟓𝟒𝟓𝟎−𝟒𝟔𝟓𝟎 𝟖𝟎𝟎
= = = Rs.4
𝟏𝟏𝟎𝟎−𝟗𝟎𝟎 𝟐𝟎𝟎

∑𝒀−𝒃∑𝑿 𝟏𝟓𝟓−𝟒𝑿𝟑𝟎
Fixed cost (a) = = X100
𝑵 𝟓

𝟑𝟓
= X 100 =Rs.700
𝟓

b. Estimated total cost for 1200 machine hours

Total cost = total fixed cost +Total variable cost
Y = a + bx
Rs.700 + Rs.4 x 1200
Rs.700 + Rs.4800
Rs. 5500
-THANK YOU-