4TH NOTES (UNIT 2

STARTS)
ELEMENTS OF COST &
OVERHEADS

• COST OBJECT
SUPPOSE THAT YOU WERE A
MANAGER AT TATA MOTORS
JAMSHEDPUR PLANT. TATA
MOTORS MAKES SEVERAL
DIFFERENT TYPES OF CARS ND
SPORT ACTIVITY VEHICLES AT
THIS PLANT.
WHAT COST OBJECT DO YOU
THINK OF?
 EXAMPLES OF COST
OBJECTS AT TATA
MOTORS

COST OBJECT - ILLUSTRATION

• PRODUCT – TATA TAMO RACEMO SPORTS ACTIVITY
VEHICLE

• SERVICE – TELEPHONE HOTLINE PROVIDING

INFORMATION AND ASSISTANCE TO TATA MOTORS
DEALERS.

• PROJECT – R&D PROJECT ON ENHANCING THE

NAVIGATION SYSTEM IN TATA CARS

• CUSTOMER – ASL MOTORS, THE DEALER THAT

PURCHASES BROAD RANGE OF TATA CARS

• ACTIVITY – SETTING UP MACHINES FOR

PRODUCTION OR MAINTAINING PRODUCTION
EQUIPMENT.

• DEPARTMENT – ENVIRONMENTAL, HEALTH AND

SAFETY DEPARTMENT.
 CLASSIFICATION OF
COST

1. CLASSIFICATION BEHAVIOUR
ACCORDING TO • FIXED COSTS
ELEMENTS • VARIABLE COSTS
• MATERIAL • SEMI-VARIABLE
• LABOUR COSTS
• EXPENSES
4. CLASSIFICATION
2. CLASSIFICATION ACCORDING TO
ACCORDING TO FUNCTIONS
NATURE • PRODUCTION
• DIRECT & COSTS
INDIRECT • ADMINISTRATIVE
MATERIAL COSTS
• DIRECT & • SELLING &
INDIRECT LABOUR DISTRIBUTION
• DIRECT & COSTS
INDIRECT • RESEARCH &
EXPENSES. DEVELOPMENT
3. CLASSIFICATION COSTS
ACCORDING TO
 CLASSIFICATION OF
COST

5. CLASSIFICATION ACCORDING TO TIME

• HISTORICAL COSTS
• PREDETERMINED COSTS

6. CLASSIFICATION OF COSTS FOR DECISION

MAKING
• MARGINAL COSTS
• DIFFERENTIAL COSTS
• OPPORTUNITY COSTS
• RELEVANT COSTS
• REPLACEMENT COSTS
• ABNORMAL COSTS
• CONTROLLABLE COSTS
• SHUTDOWN COSTS
• CAPACITY COSTS
• URGENT COSTS
 CLASSIFICATION
ACCORDING TO
FUNCTIONS

• PRODUCTION COSTS: ALL COST INCURRED FOR

PRODUCTION OF GOODS ARE KNOWN AS
PRODUCTION COSTS.
• ADMINISTRATIVE COSTS: COST INCURRED FOR
ADMINISTRATION LIKE OFFICE SALARIES, PRINTING
AND STATIONERY, OFFICE TELEPHONE, OFFICE RENT,
OFFICE INSURANCE ETC.
• SELLING AND DISTRIBUTION COSTS: ALL COST
INCURRED FOR PROCURING AN ORDER ARE CALLED
AS SELLING COST WHILE ALL COST INCURRED FOR
EXECUTION OF ORDER ARE DISTRIBUTION COSTS.
MARKET RESEARCH EXPENSES, ADVERTISING, SALES
STAFF SALARY, SALES PROMOTION EXPENSES ARE
SOME OFF THE EXAMPLE OF SELLING COSTS.
TRANSPORTATION EXPENSES INCURRED ON SALES,
WAREHOUSE RENT ETC ARE EXAMPLES OF
DISTRIBUTION COSTS.
• RESEARCH AND DEVELOPMENT COSTS: IN THE
MODERN DAYS RESEARCH AND DEVELOPMENT HAS
BECOME ONE OF THE IMPORTANT FUNCTIONS OF A
BUSINESS ORGANISATION. EXPENDITURE INCURRED
FOR THIS FUNCTION CAN BE CLASSIFIED AS
 CLASSIFICATION
ACCORDING TO TIME

• HISTORICAL COSTS: THESE ARE THE COSTS WHICH

ARE INCURRED IN THE PAST I.E. IN THE PAST YEAR,
PAST MONTH OR EVEN IN THE LAST WEEK OR
YESTERDAY. THE HISTORICAL COST OF A CERTAIN
AFTER THE PERIOD IS OF OVER. THOUGH
HISTORICAL COSTS HAVE LIMITED IMPORTANCE,
STILL THEY CAN BE USED FOR ESTIMATING THE
TRENDS OF FUTURE.
• PREDETERMINED COSTS: THESE COSTS RELATING
TO THE PRODUCT ARE COMPUTED IN ADVANCE OF
PRODUCTION, ON THE BASIS OF A SPECIFICATION OF
ALL FACTORS AFFECTING COST AND COST DATA.
FREE DETERMINE COST MAY BE EITHER STANDARD
OR ESTIMATED. IT CAN BE USED IN ANY BUSINESS
SITUATION OR DECISION-MAKING WHICH DOES NOT
REQUIRE ACCURATE COST.
 CLASSIFICATION ACCORDING
TO MANAGEMENT DECISION
MAKING

• MARGINAL COSTS: MARGINAL COST IS THE CHANGE

IN THE AGGREGATE COST DUE TO CHANGE IN THE
VOLUME OF OUTPUT BY ONE UNIT. THESE COSTS
CAN BE EFFECTIVELY USED FOR DECISION MAKING
IN VARIOUS AREAS.
• DIFFERENTIAL COSTS: DIFFERENTIAL COSTS ARE
ALSO KNOWN AS INCREMENTAL COSTS. THIS COST IS
THE DIFFERENCE IN TOTAL COST THAT WILL ARISE
FROM THE SELECTION OF ONE ALTERNATIVE TO THE
OTHER. THESE TYPE OF ANALYSIS IS USEFUL FOR
TAKING VARIOUS DECISIONS LIKE CHANGE IN THE
LEVEL OF ACTIVITY, ADDING OR DROPPING A
PRODUCT, CHANGE IN PRODUCT MIX, MAKE OR BUY
DECISIONS, ACCEPTING AN EXPORT OFFER ETC.
• OPPORTUNITY COSTS: IT IS THE VALUE OF BENEFIT
SACRIFICED IN FAVOUR OF AN ALTERNATIVE COURSE
OF ACTION. IT IS THE MAXIMUM AMOUNT THAT
COULD BE OBTAINED AT ANY GIVEN POINT OF TIME
IF A RESOURCE WAS SOLD OR PUT TO THE MOST
VALUABLE ALTERNATIVE USE THAT WOULD BE
PRACTICABLE. OPPORTUNITY COST OF GOODS OR
SERVICES MEASURED IN TERMS OF REVENUE WHICH
 CLASSIFICATION ACCORDING
TO MANAGEMENT DECISION
MAKING

• RELEVANT COSTS: THE RELEVANT COST IS A COST

WHICH IS RELEVANT IN VARIOUS DECISIONS OF
MANAGEMENT. DECISION MAKING INVOLVE
CONSIDERATION OF SEVERAL ALTERNATIVE COURSE
OF ACTION. IN THIS PROCESS WHATEVER COSTS ARE
RELEVANT ARE TO BE TAKEN INTO CONSIDERATION.
• REPLACEMENT COSTS: THIS COST IS THE COST AT
WHICH EXISTING ITEMS OF MATERIAL ARE FIXED
ASSET CAN BE REPLACED.
• ABNORMAL COSTS: IT IS AN UNUSUAL OR A TYPICAL
COST WHOSE OCCURRENCE IS USUALLY NOT
REGULAR AND IS UNEXPECTED. THIS COST ARISES
DUE TO SOME ABNORMAL SITUATION OF
PRODUCTION. ABNORMAL COST ARISES DUE TO IDLE
TIME, MAYBE DUE TO SOME UNEXPECTED HEAVY
BREAKDOWN OF MACHINERY. THEY ARE NOT TAKEN
INTO CONSIDERATION WHILE COMPUTING COST OF
PRODUCTION OR FOR DECISION MAKING.
 CLASSIFICATION ACCORDING
TO MANAGEMENT DECISION
MAKING

• CONTROLLABLE COSTS: IN COST ACCOUNTING,

COST CONTROL AND COST REDUCTION ARE
EXTREMELY IMPORTANT. CONTROLLABLE COST
ARE THOSE WHICH CAN BE CONTROLLED OR
INFLUENCED BUY A CONSCIOUS MANAGEMENT
ACTION. FOR EXAMPLE COST OF TELEPHONE,
PRINTING ETC.
• SHUTDOWN COSTS: THESE COSTS ARE THE COSTS
INCURRED IF THE OPERATION ARE SHUT DOWN
AND THEY WILL DISAPPEAR IF THE OPERATIONS
ARE CONTINUED. FOR EXAMPLE COST OF
CENTRING THE PLANT AND MACHINERY AND
INSTRUCTION OF SHEDS FOR STORING EXPOSED
PROPERTY.
• CAPACITY COSTS: THESE COSTS ARE NORMALLY
FIXED COSTS. THE COST INCURRED BY A COMPANY
FOR PROVIDING PRODUCTION, ADMINISTRATION
AND SELLING AND DISTRIBUTION CAPABILITIES TO
PERFORM VARIOUS FUNCTIONS. EX. COST OF
PLANT, MACHINERY AND BUILDING FOR
PRODUCTION, WAREHOUSE ETC.
• URGENT COSTS: THESE COSTS ARE THOSE WHICH