Unit 1 Cost Concepts 1.4 Introduction Cost, a key concept in economics, is the monetary expense incurred ‘by organizations for various purposes, stich as acquiring resources, producing goods and services, advertising, and hiring workers. In other words, cost can be defined as monetary expenses that are incurred by an organization for a specified tiling or activity. According to Institute of Cost and Work Accountants (ICWA), cost implies “measurement in monetary terms of the amount of resources used for the purpose of production of goods or rendering services” In terms of manufacturing, costs refer to sum total -of monetary value of resources used in producing or manufacturing a product. These resources can be raw material, labor, and land. 1.2 Cost 1.2.1 Meaning of Cost Acostis an expenditure required to produce or sell a product or get an asset ready for normal use. In other words, it's the amount paid to manufacture a product, purchase inventory, sell merchandise, or get equipment ready to use in a business process. ‘There are many different costs, including fixed and variable, but they are all accounted for in the same way. Costs are recorded as expenses on the income statement during and accounting period and cleared out in a closing entry at the end of the period. Each cost is recorded in a different expense account depending on its purpose and cost driver, For example, the cost recorded to purchase inventory is booked in the cost of goods sold account when inventory is sold. These expenses are presented in a section of the income statement separate from the operating expenses. Cost of goods sold is used to compute gross margin and the gross margin ratio. Costsincurred sell products like employing sales staff, renting selling space, and purchasing display ranks for products are recorded as selling expenses and presented on a multi-step income statement. 1.3. Expense 1.3.1 Meaning of Expense ‘An expense is a cost that has expired or been taken up by activities that help generate revenue. ‘Therefore, all expenses are costs, but not all costs are expenses. Expenses can be related to a multitude of different types of costs such as labor (salaries, wages, and employee benefits), marketing and advertising, rent, utility bills, insurance, taxes, interest, depreciation, and amortization. Expenses can also be recorded into any number of different line items on an income statement to reflect the particular type of expense. Scanned with CamScannerES i Concepts nit cost ; iV «din the following ways: An expense is devine up the cash (asset) u * Ofc sar ease hich is a charge to reduce the book value of ca Depreciat pital equipment ‘hine ora building) to reflect its ee ee pee into a cash “(e.g mad repaid rent, is an asset that turns into a cash expense ‘a Aprepald expense, such as Preps pense as the Fent suse up each month of Expenses 1 es affect o financial accounting statements but exert the most impact me statement under five major headings, as listed statement. They appen "(Coes cast or Goods Sold (COGS) Is the eost of acquiring 1. Cost of Goods ff ished products. It does not include selling and administra “turning them My, nor interest expense or losses on extraordinary items, the whole sanutactring firms, COGS includes direct labor, direct materials, reat ce company, itis called a cost of services rather than COGS. + pore company that sells both goods and services, itis called cost of sale, Examples of COGS Include direct materia, direct costs, and production overhead. 2, Operating Expenses ~ Selling/Geyeral and Admin: Operating expenses are related to seing goods and services and include sales salaries, advertising, and shop rent. General and administrative seven ses include expenses incurred while running the core in ofthe businessand include executive Salories, RAD, travel and training, and IT expenses. 4, financial Expenses: They are costs incurred from borrowing from lenders or creditors. They are Expenses outside the company's core business, Examples inchude loan origination fees and interest on money borrowed. 4, Extraordinary Expenses: Extraordinary expenses are costs incurred for large one-time events or transactions outside the firm's regular business activity. They include laying off employees, selling Jand, or disposal of a significant asset. 5. Non-Operating Expenses: These are costs that cannotbe linked back to operating revenues. Interest expense is the most common non-operating expense. Interest isthe cost of borrowing money. Loans from banks usually require interest payments, but such payments don’t generate any operating income. Hence, they are classified as non-operating expenses. 1.4 Cost Vs. Expense Costs can be defined as money paid or spent to acquire an asset. Its mainly a one-time payment that is capitalized and reflected on a balance sheet. The amount spent on the purchase af such assets which are required for the business to earn future benefits. Expenses sound similar to that of costs. The expense is an amount of money that must be spent especially regularly to pay for something. An expense {s an ongoing payment, like rent, depreciation, salaries, and marketing. It is spent monthly/quarterly/ annually and is reflected in the income statement and such an impact on the profitability and margins, on the in low, ome ing raw materials tivecosts incurred and manufacturing Costs Expenses Meaning Investments/expenditure made | Regular expenses required for purchasing assets/property. _| for maintaining the assets/ property. Place in financial statement | Is a balance sheet item. Is an income statement item. Impact on profitmargins | It does not directly affect profit __ | It directly affects profit margins margins of the company. of the company. | Motive Purchase/addition of an asset. Payment necessary to generate oi, revenue from these purchases/ assets. 2 a ——at Scanned with CamScannerUnit1 Cost Concepts Impact on capital structure [It does impact capital structure if There is no Impact on a the asset is non-current, company's capital structure, Impact on liquidity ratio Icurrent asset impact liquidity | ‘There is no impact on liquidity ratio, ratio, Example Fixed asset, prepaid rent, Raw material, depreciation, inventory etc, labor cost etc, 1.5 Loss 1.5.1 Meaning of Loss A loss is an excess of expenses over revenues, either for a single business transaction or in reference to the sum ofall transactions for an accounting period. The presence ofa loss for an accounting period is closely watched by investors and creditors, since it can signal a decline in the creditworthiness ofa business. This is particularly the case when the loss is derived from just the operational activities of a business. 1.5.2 Types of Loss A loss occurs anytime obtain this asset. 1, An operating loss occurs when the revenue derived from selling your business’ products is less than the expenses incurred to make them. These expenses include depreciation, the cost of the raw materials to make the goods, and labor. 2. Capital losses occur when assets held as an investment or for production purposes, such as land or manufacturing equipment, are sold for less than your value in the asset. Your value in the asset is how much you spent to acquire it, minus any depreciation you might have claimed based on using the asset over the years. 3. Net loss occurs when all sources of income are less than the total of all expenses and losses from disposing assets. 1.6 Classification of Cost Cost classification is the logical process of categorising the different costs involved in a business process according to their type, nature, frequency and other features to fulfil accounting objectives and facilitate economic analysis. Costrefers to the value sacrificed with the aim of gaining something in return. Every business process involves some cost. It is the basis of profit determination for an organisation. A particular cost can be allocated under multiple categories. For instance; salary paid to an employee is a labour cost as well as a fixed cost. Moreover, the different elements of cost classification are linked to each other in one or the other way. Basis of Classification ‘There are various kinds of cost incurred in the production of goods or services, and these costs are categorised systematically. Some of the principal basis on which different costs can be allocated are as follows: A, Cost Classification by Nature ‘The cost can be differentiated by its nature or the purpose for which it has occurred. It can be treated as an expense under this category and the expenses so incurret ivided as follows: 1, Material: Material cost is the cost of the raw material and its related cost such as procurement cost, taxes, insurance, freight inwards, etc. 2, Labour: Labour cost is the salary and wages paid to the employees, ie. permanent, temporary or contractual employees working in an organisation. It also includes PF contribution, bonus, commission, incentives, allowances, overtime pay, etc. Other Expenses: All the other overheads excluding material and labour comes under this head, Some of these are packaging, promotion, job processing charges, etc. a business sells an asset for less than the amount the business spent to 3 Scanned with CamScannerunit Cost! Concepts | ification by Relation to Cost Centre & Cost Case differentiating the costs Is categorising them by ther alloca Another basis O dsor services. he points as mentioned earlier under the cosy stot the production process of goods further sub-categorise th cost classiticay vprused under this category to further sub-categorise the elements ofthis category by mer understanding ofit, let us read below: BOTY. To gat " oi piect Cost: Directcostis the significant cost immediately associated witha, ree ye seen as a rime costfr any business. tis sub-divided into direct Jabour cost and other direct expenses. ; 2. Indirect Cost: Indirect costis the cost which cannot be directly allocated toa particular of production. It is a secondary cost and is majorly seen as of three types ~ cost, indirect labour cost and other indirect expenses. sification by Functions . aes cost can also be classified by the business functions for which the resources been used, There are five significant functions of a business which involves some expense and ne essential to the organisation in their way. The cost involved in such business operations are explained QW: 7 Production: Production cost comprises of all the direct and, indirect costs incurred in th production of goods and services. ei 2, Administration: The costs involved in the management activities of an organisation like electricity, stationery, telephone expenses, rent etc. These are also known as administrative overheads. 3, Selling: The indirect costs incurred on the sales function of the goods and services like an advertisement, promotion, research, customer service, etc. are clubbed under selling cost 4, Distribution: Distribution cost refers to the cost incurred for making the goods or services available to the customers. These are warehousing, delivery service, transportation, etc. 5. Research and Development: Research is essential to develop a new product or modify an existing one. The cost incurred on the research team, research implementation, findings, ete. comes under this category. D. Cost Classification by Behaviour ‘The costinvolved in any business process can be differentiated on the grounds ofits volatility concerning the fluctuation in business activity in the short run. The following classification of cost by its behaviour will give a clear illustration of the above statement: 4. Fixed Cost: The cost which is hardly affected by the temporary change taking place in business activity is known as a fixed cost. Itincludes rent, depreciation, lease, salary, etc. Variable Cost: The cost which changes proportionately with the change in production quantity or other business activity is termed under variable cost. Raw material, packaging, sales commissions, wages, etc. are variable costs. Semi-Variable Cost: The cost which is moderately influenced by the change in business activity is called semi-variable cost. It includes power consumption, maintenance cost, management cost, supervision cost, etc. E. CostClassification by Management Decision Making Cost is not just a price paid to generate some value, but it is also used as a tool by the management for decision making, Managerial decisions are framed depending upon the following types of cost involved in carrying out of business: 1. Marginal Cost: Marginal cost is the cost of producing an additional unit and its impact on the total cost of production. Differential Cost: When there is an increment or decrement in the cost of bulk production, the change in the cost ofa single unit is also determined which is known as differential cost. Opportunity Cost: The value of one or more products given up to acquire the desired product or service is known as opportunity cost. For instance; while choosing green tea, a person has t0 give up the value he must have derived from coffee or regular tea. Production proce Material cost, dines articular process indirect materia, 2. 3 Scanned with CamScannerUnit) Cost Concepts 4. nent Cost; When machinery ar any other asset becomes obsolete or involve high J simultaneously whetter asset is avallable in the market which can replace | the cost Involved tn such substitution bs knwo as repl For example; a Hation company needs to replace Its trucks from Uine to time to avald excessive penses, & cost which has been born by the organisation in the past and cannot be termed as a sunk cost. Freight inwards paid at e time of selling it. ecovered atany stay the tine of buying 6, Normal Co: usual circumstances Is material, rent, ete 7. Abnormal Cost: The cost that aris al cost. For ins of the business process chinery has to be written off att salary, suddenly and unknowingly under unfavourable situations ance; workers go on strike, theft or robbery, fire in the ete, ble Cost: Such costs are under the control of management and can be prevented as per the organisational need. For example; an enterprise upgrades its technology by installing self- ‘operative machines to avoid the labour charges it pays. 9. Unavoidable Cost: The cost which is pre-determined and inevitable is called an unavoidable cost. F, Cost Classification by Production Process This basis of cost classification is significantly applicable in the manufacturing industries or factories where goods are produced, All production or manufacturing activities involve different pes of costs. According to the nature of the production process, these costs can be classified as ielow: 1. Batch Cost: The cost incurred while producing a whole lot comprising of identical products (batch) is known as batch cost. Each batch differs from the other, and the units lying under a batch are identified by their batch number. Pharmaceuticals, automobiles, electronic products are some of the examples. 2. Process Cost: The cost incurred on performing different operations ina streamlined production process is termed as a process cost. By dividing the total cost of a process with the number of units produced, we can derive the process cost of a single unit or product. 3. Operation Cost: The cost involved in a particular business function contributing to the production process is known as operation cost. Ithelpsin regulating the mechanism of business activities by monitoring the cost incurred on each business operation. 4. Operating Cost: Operating cost refers to the day to day expenses incurred by an organisation to ensure uninterrupted functioning of the business is known as an operating cost. Contract Cost: The cost of entering into a contract with a buyer or seller by mutually agreeing tothe terms and conditions so mentioned is called a contract cost. Itincludesa bidding contract, price escalation contract, tenders, etc. 6. Joint Cost: The combined cost involved in the production of two or more useful products simultaneously is known as the joint cost. For example; the cost of processing milk to get cottage cheese and buttermilk. G. Cost Classification by Time The nature, importance and liability of a cost vary as per the time it takes place or has been assessed. A cost which is a priority today, may not be that important tomorrow or a cost which has | been overlooked today, may be considered as a relevant cost tomorrow. Thus, depending upon the period a cost has occurred or assessed, it can be categorised under the following heads: | 1. Historical Cost: Any actual cost ascertained and evaluated after it has been incurred, is termed a historical cost. It can be committed either on the production of goods and services or asset acquisition. Pre-determined Cost: The cost which can be Identified andl calculated before the production of goods and services based on the cost factors and data is called a pre-determined cost. It can be either a standard cost or an estimated c Scanned with CamScannerUnit1 Cost Concepts > 3, Standard Cost: An actual cost which is pre-determined as per certain norms and uidel, provide as a base for cost control, i termed as a standard cost. nest Estimated Cost: The cost of business operation presumed on the grounds of exper ienown as an estimated cost. Itis merely based on assumptions and therefore considera <° less accurate to determine the actual cost. toh 1.7 Cost Driver A cost driver isa unt that derives the expenses and sets a basis on which a particular cost allocated between the different departments and on the basis of that driver's activity completeq on be partcfar period the costs allocated These ar the structural determinants ofthe setites on cost is being incurred and determine the behavior of the costs on an activity. lich ‘Acost driver isthe direct cause of a cost and its effect ison the total cost incurred. For exa ityou ate to determine the amount of electricity consumed in a particular period, the number of eo consurned determines the total bill for electricity. In such a scenario, the number of units of lec consumed is a cost driver. ty Cost driver is an activity that is the root cause of why a cost occurs. It must be applicable relevantto the eventthatis incurring a cost. A cost driver assists with allocation expenses ina systensnd ‘manner that results in more accurate calculations of the true costs of producing specific products, Examples of cost drivers are as follows: Direct labor hours worked Number of customer contacts Number of engineering change orders issued Number of machine hours used Number of product returns from customers 1.7.1. Types of Cost Driver . There are many types of cost drivers in cost accounting. As per traditional accounting, the manufacturing costs and indirect costs are allocated on the predefined rate based on the activity performed. Numbers of Set-Ups Number of Machine Hours Number of Processed Orders Number of Orders Completed Number of Labor Hours Number of Deliveries 7. Number of Cails Taken 8, Number of Rides 1.7.2. Cost Driver Analysis Cost driver analysis means analyzing the various possible cost drivers for a particular type of cost or activity etc. and explaining their cause and effect relationship between the activity and cost driver. It isadvisable to use the most correlated cost driver for making any decisions relating to apportionment of cost, reduction of costs, etc. But, it should be noted that correlation is justa way to prove the relationship. Ultimately, the cause and effect relationship is a must. Just for example, usually, material cost and labor cost will correlate. This does not mean labor costs can be a cost driver for material costs. 1.7.3. Importance of Cost Driver ‘4% Itis evident to know the cost of the product before entering the market to pre-identify whether the company can make profits out of the products they propose to sell. This application is essential to identify the cost allocable to various products as the costis allocated based on the activities being performed, and only those costs should be assigned to a product that includes a particular activity in its productions. + Itmakes that allocation possible, and only then, the real cost of the product being manufactured will be determined. Then the management would take the final decision on either to enter the market or not, whether to produce the product or not. ee Nee Scanned with CamScannerUnit1 Cost Concepts 1.7.4 Advantages # It provides a competitive edge to the business as they give a precise distribution of cost based on activities performed, # ‘These are an advantage for a product as they bring out the actual cost incurred on the products based on the correct allocation of the processes or activities. + It improves the relationship between the departments, as there are many common activities and processes which are performed for in various department. # Ithelps management to see the various departments of a business as one single business unit as these drivers create a relationship between the departments. 1.7.5 Disadvantages # Itisa complex process, and not every business can apply the cost drivers in its activities. # Itis hard to determine the exact basis for the cost drivers to get the actual costs, which will defeat the ultimate goal of the business to find the actual cost of the product. * Cost drives application requires a thorough understanding of the cost functions. Otherwise, it would either be a selection of the wrong basis of allocation, or it would be an incorrect selection of process. 1.8 Cost Unit ‘The cost unit is defined as the unit of product, service, time, activity, or combination in relation to which cost is estimated. At the time of preparing the cost statements and accounts, a particular unit is required to be selected. It helps to identify the cost accurately and allocate the various expenses. Itassists the cost measurement process of the company and promotes comparison. A cost unit may be expressed in terms of number, length, area, weight, volume, time, or value. Examples of Cost Unit The following are examples of cost units applied in different industries: Brick Industries Cost unit per 1000 bricks Coal Mines Cost unit per quintal Cotton Mills Cost unit per meter Electric Company _| Cost unit per unit Transport Companies | Cost unit per kilometer Steel Companies Cost unit per ton ‘Water Supply Cost unit per 1,000 liters Furniture Industries | Cost unit per number Oil Companies Cost unit per liter Soap Factory Cost unit per dozen, per kilogram, or per tablet 4 Wemeasure coal in tonne. So, tonneis the cost unit. One metric ton will be equal to 1000 kgs but our cost unit will be tonne or ton. If you want to buy coal, you buy coal at prices range between Rs 770 and Rs. 1,700 a tonne. & We know that wall bricks are measured in one thousand. So, cost unit will thousand bricks. These days, one thousand bricks cost is Rs. 5000. & Cost unit of transport service is per ton per km. For example, you have 20 ton product. Transport service provider will take the Rs. 500 per ton per kilometer. It means, you have to pay Rs. 10000 for transferring goods upto one kilometer, If you have to transfer goods for 10 kilometers. You will pay Rs, 100,000. 1.8.1. Characteristics of a Cost Unit Aunit of cost must possess the following characteristics: 4 Itmust be one that expenditure can be conveniently associated with. 4 Itmust be appropriate or natural to business operations and the product. 7 Scanned with CamScanner‘Uniti Cost Concepts ‘a Temust be certain or definite and not change over time, F emust be simple to understand and to quote. E itmust be universally accepted. 4.8.2 Types of Cost Units i rized as follows: ‘st umits can be categorized as / ot pte Un: These sea singe standard or uni of measurement ofthe goods manufactured fy r ter). per kilogram, per quintal, per ton, per gallon, or per met 2. eoniposite Unit or Complex Unit: These combine two simple units (eg, per passenger-kilom * per ton-kilometer or per kilowatt-hour). .9 Overheads ; ; ” Overhead is those costs required to run a business, but which cannot be directly attributed to an specific business activity, product, or service. Thus, overhead costs do not directly lead to the generaticy, ofprofits. Overhead isstill necessary, since it provides critical support for the generation of profit-makin activities. Overheads are business costs that are related to the day-to-day running of the business. Unlite operating expenses, overheads cannot be traced to a specific cost unit or business activity. Instead, they support the overall revenuie-generating activities of the business. Examples of Overhead Costs Overhead costs areimportantin determining how much a company must charge for its products or services in order to generate a profit. The most common overhead costs that any business incur include, 4, Rent:Rentis the cost thata business pays for using its business premises. Ifthe property is purchased, then the business will book depreciation expense. Rent is payable monthly, quarterly, or annually, ag agreed in the tenant agreement with the landiord. When the business is experiencing slow sales, it can reduce this cost by negotiating the rental charges or by moving to less expensive premises, 2. Administrative costs: Administrative costs are costs related to the normal running of the business and may include costs incurred in paying salaries to a receptionist, accountant, cleaner, ete. Such costs are treated as overhead costs since they are not directly tied to a particular function of the business and they do not directly result in profit generation. Rather, administrative costs support the general running of the business. Examples of administrative costs may include audit fees, legal fees, employee salaries, and entertainment costs. A business can reduce administrative expenses by laying off some of its employees, switching employees from full-time to part-time, hiring employees ona contract basis, or by eliminating certain expenses, such as entertainment and office supplies. 3. Utilities: Utilities are the basic services that the business requires to support its main functions. Examples of utilities include water, gas, electricity, internet, sewer, and phone service. A business may be able to reduce utility expenses by negotiating for lower rates from suppliers. 4, Insurance: Insurance is a cost incurred by a business to protect itself from financial loss. There are various types of insurance coverage, depending on the risk that may cause loss to the business. For example, a business may purchase property insurance to protect its property or business premises from certain risks such as flood, damage, or theft, Another type of insurance is professional liability insurance that protects the business (such as an accounting firm or law firm) from liability arising from malpractice, Other types of insurance include health insurance, home insurance, renter’s insurance, flood insurance, life insurance, disability insurance, etc. 5, Sales and marketing: Sales and marketing overheads are costs incurred in the marketing of a company’s products or services to potential customers. Examples of sales and marketing overheads include promotional materials, trade shows, paid advertisements, wages of salespeople, and commissions for sales staff. The activities are geared toward making the company’s products and services popular among customers and to compete with similar products in the market. 6. Repair and maintenance of motor vehicles and machinery: Rent and maintenance overheads are incurred in businesses that rely on motor vehicles and equipment in their normal functions. Such businesses include distributors, parcel delivery services, landscaping, transport services, and equipment leasing. Motor vehicles and machinery need to be maintained on a continuous b: repaired whenever they break down. eter, Scanned with CamScannerUnit1 Cost Concepts 1.9.1. Types of Overheads There are three main types of overhead that businesses incur, The overhead expenses vary depending on the nature of the business and the industry it operates in. 1. 3. Fixed overheads Fixed overheads are costs that remain constant every month and do not change with changes in business activity levels, Examples of fixed overheads include salaries, rent, property taxes, depreciation of assets, and government licenses. Variable overheads Variable overheads are expenses that vary with business activity levels, and they can increase or decrease with different levels of business activity. During high levels of business activity, the expenses will increase, but with reduced business activities, the overheads will substantially decline or even be eliminated. Examples of variable overheads include shipping costs, office supplies, advertising and marketing costs, consultancy service charges, legal expenses, as well as maintenance and repair of equipment. Semi-variable overheads ‘Semi-variable overheads possess some of the characteristics of both fixed and variable costs. A business may incur such costs at any time, even though the exact cost will fluctuate depending on the business activity level. A semi-variable overhead may come with a base rate that the company must pay at any activity level, plus a variable cost that is determined by the level of usage. Examples of semi-variable overheads include sales commissions, vehicle usage, and some utilities such as power and water costs that have a fixed charge plus an additional cost based on the usage. 1.9.2 Classification of Overheads The following points highlight the four categories in classification of overheads. The categories are: 1, Function-Wise Classification 2. Element-Wise Classification 3, Behaviour-Wise Classification 4. Controllability-Wise Classification. A Function-Wise Classification: Under this method, overheads are classified on the basis of major functions of a firm. 1, Factory or Manufacturing or Production Overhead: These overheads include all indirect expenses (including indirect material, indirect labour, and indirect expenses) which are incurred for the purpose of production activities that starts from the procurement of materials and ends with the primary completion of the product, eg. Depreciation on Plant and Machinery, Lighting and Heating, Insurance of Plantand Machinery, consumable stores, Cost of spare parts, Repairs of Plant and Machinery etc. These overheads also include expenses relating to factory administrations, eg, Printing & Stationery, Postage and Telegram, Remuneration to directors, or other higher officers who are related to production process of the factory. 2. Office and Administration Overhead: These overheads include all expenses relating to Office and Administration that cannot be directly related to the production but are indirectly related. In other words, expenses of this nature are: Directors’ Remunerations, Office Rent and Taxes, Office Lighting, Printing and Stationery, Audit and Legal fees, Bank Charges, Salaries to staff etc. 3. Selling and Distribution Overhea incurred for the purpose of selling acti ‘These expenses includes: i, Selling, and ii, Distributions expenses which further denote: 4 Selling Expenses: These expenses include: Advertisement expenses, Salesmen’s salaries, Promotion expenses, Showrooms expenses, Travelling expenses of salesmen, cost of price list and catalogues, expenses, incurred for maintaining ‘After selling and Distributions expenses are those which are ties. Scanned with CamScannerEGE — ———l” cost Concepts Distribution Expenses: Secondary Packing charges, Reconditioning the empty ct nt-Wise Classification: B. Elemer is method actually follows, i i lements as: ‘re spread over into the various el ‘ 2 overheads are Spr et materials include the following: Consumable Stores, Loose Tools, Joss arising from deterioration of stores, small tools fy, mt “These expenses include: Carriage Overhead, Godown fen, Maintenance and running expenses of delivery vehicle. containers returned by customers for re-use, etc, in true sense of the term, the proper definition of overheag, wher 4. Indirect Material: In« Fuel, Lubricating oil, cotton waste, generaluse etc he following: Salary to supervisory staff and ti + Indirect labour includes the following: Salary to supervisory staff and works 2 Indira ae leave and holidays, salary of foremen, employer's contributions ‘anager, payment for idle time, © Tr wages for maintenance workers, wages of store-keeper etc. 4 Indirect Expenses: Indirect expenses include: Rent, Rates and Taxes, Insurance, Travelling expenses, Repairs and maintenance of Plant and Machinery, Depreciation on Plant and cert used for production purposes, Canteen expenses, Expenses relating to keep ang handle stores, etc. C. Behaviour-Wise Classification: Some overheads which ten overhead. At the same time, there ar fixed, whatever the volume of productions is there ie. which partly may vary and partly remain fixed .e. the behaviour-wise classification consists of: ‘L. Variable Overhead: Variable overheads are those overheads which tend to vary directly with the change of the volume of output. It is stated that there isa linear relationship between the volume of output and the variable overheads. As variable overheads tend to vary with the volume of output, unit variable cost is likely to remain constant at all levels although the total variable overhead will vary with the volume of production. Examples are: indirect material, indirect labour, salesmen's commission, fuel, etc. 2. Fixed Overhead: Fixed overheads are those overheads which do not vary with the volume of output within a certain range of activity and within a certain period of time. It is interesting to note that as the fixed overheads remain unaffected by the volume of output, per unit cost of a product will be decreased if the volume of output increases, and vice-versa in the opposite case. * Examples of fixed overheads are: Rent, Rates and Taxes, Salaries, Depreciation of Machinery and Building, Interest on Capital, Audit Fees, etc. It becomes clear from the above table that variable cost per unit remains same irrespective of the volume of output, but fixed overhead is gradually decreasing with the increased volume of output. 3. Semi-Variable Overheads: It has already been stated above that semi-variable overheads are those which partly vary with the volume of output and partly remain fixed at a certain level of activity. These overheads include: Depreciations on Plant and Machinery, Repairs and Maintenance of Plant and Machinery, etc. (for example, if the volume of output does not make any change widely, repairs and maintenance expenses remains fixed up to a certain level, but if the volume of production increases, addition expenditure may be incurred for repairs and maintenance. D. Controllability-Wise Classification: Under this method, overheads are grouped into (a) Controllable, and (b) Un-controllable. 1. Controllable: Variable overheads are controllable as it tends to vary with the volume of output , according to the needs of the management, 2, Un-controllable: Fixed overheads are treated as un-controllable overheads as these overheads cannot be controlled ie, it does not depend on the volume of production. d to vary with the volume of productions directly i.e. variable re some overheads which do not practically vary, rather remain .d overhead. And there are some overheads io not alter, ie. Semi-variable overheads. Thus, 10 Scanned with CamScanner