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CLASSIFICATION OF COST
Comparing Merchandising and Manufacturing Activities
Merchandisers . . . Buy finished
goods. Sell finished goods.
Manufacturers . . . Buy raw materials. Produce and sell
finished goods.
Shoppers Stop
Classification Of Cost
1. According To Nature2. According to function3. According To Identifiably4. According To Behavior5. According Association With Products6. According to Controllability7. According To Normality8. According To Time9. According To Relevance and 10.Other Costs
Classification Of Cost
1. According To Nature Or Elements
Materials Cost
LabourCost
Expenses
Cost Elements
Materials Labour Expenses
Classification Of Cost
2 According to functions
ProductionCost
AdministrationCost RD Cost
Selling &Distribution
Cost
Classification Of Cost
3 According To Identifiably
Direct Indirect
Direct Costs and Indirect Costs
Direct costs
Costs that can beeasily and conveniently traced to a unit of product or other cost objective.
Examples: direct material and direct labor
Indirect costs
Costs cannot be easily and conveniently traced to a unit of product or other cost object.
Example: manufacturing overhead
The ProductThe Product
DirectMaterials
DirectLabor
ManufacturingOverhead
Manufacturing Costs
Direct Materials
Those materials that become an integral part of the product and that can be conveniently
traced directly to it.
Example: A radio installed in an automobile
Direct Labor
Those labor costs that can be easily traced to individual units of product.
Example: Wages paid to automobile assembly workers
Direct Expenses
Those Expenses that can be easily Charged to individual units of product.
Example: Design Cost Of a car
Classification Of Cost
4 According To Behavior
Fixed VariableSemi-Fixed
Variable
Cost Classifications for Predicting Cost Behavior
How a cost will react to changes in the level of
business activity. Total variable costs
change when activity changes.
Total fixed costs remain unchanged when activity changes.
Total Variable Cost
Total Cost of materials depends upon How much materials you use
Materials used
To
tal m
ater
ials
bill
Variable Cost Per Unit
Materials Cost
Pe
r U
nit
Cos
t
Per unit materials cost will remain constant
Total Fixed Cost
Your fixed cost probably does not change when you makeproduction.
Total production
Mo
nthl
y B
asic
T B
ill
Fixed Cost Per Unit
production
Mo
nthl
y B
asic
Bill
per
uni
t
The average fixed cost per unit decreases as more production is made.
Cost Classifications for Predicting Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remainsas activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Fixed cost per unit goesthe same even when the down as activity level goes up. activity level changes.
Quick Check
Which of the following costs would be variable with respect to the number of cones sold at a Walls Ice Cream shop? (There may be more than one correct answer.)
A. The cost of Rent of the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
Quick Check
Which of the following costs would be variable with respect to the number of cones sold at a Walls Ice Cream Shop? (There may be more than one correct answer.)
A. The cost of rent of the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
Quick Check
Which of the following costs would be variable with respect to the number of people who buy a ticket for a show at a movie theater? (There may be more than one correct answer.)
A. The cost of hiring the film.
B. Royalties on ticket sales.
C. Wage and salary costs of theater employees.
D. The cost of cleaning up after the show.
Quick Check
Which of the following costs would be variable with respect to the number of people who buy a ticket for a show at a movie theater? (There may be more than one correct answer.)
A. The cost of hiring the film.
B. Royalties on ticket sales.
C. Wage and salary costs of theater employees.
D. The cost of cleaning up after the show.
The royalties on ticket sales is directly related to the number of tickets sold.
The cost of cleaning up MAY also be variable if the theater pays cleaning crews by the hour. The more tickets sold would
increase the time it would take to clean up the theater.
Classification Of Cost
5 According to Association With Products
ProductCosts
PeriodCosts
Quick Check
Which of the following costs would be considered a period rather than a product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production facility.
Quick Check
Which of the following costs would be considered a period rather than a product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production facility.
Classification Of Cost
6 According to Controllability
ControllableCosts
Uncontrollable Costs
Classification Of Cost
7 According To Normality
NormalCosts
AbnormalCosts
Classification Of Cost
8 According To Time
HistoricalCosts
Pre-determined Costs
Classification Of Cost
9 According To Relevance
Opportunity CostRelevant CostSunk CostShut Down CostDifferential CostImputed CostOut-Of-Pocket CostMarginal CostReplacement Cost
Opportunity Costs
The potential benefit that is given up when one alternative is selected over another.
Example: If you werenot attending college,you could be earningRs.15,000 per year. Your opportunity costof attending college for one year is Rs.15,000.
Sunk Costs
Sunk costs cannot be changed by any decision. They are not differential costs and should be
ignored when making decisions.
Example: You bought an automobile that cost Rs.3.5 lacs two years ago. The Rs.3.5 lacs cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the Rs 3.5 Lacs cost.
Quick Check
Suppose that your car could be sold now for Rs2.5 Lacs. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
Quick Check
Suppose that your car could be sold now for Rs. 2.5Lacs. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
Differential Costs and Revenues
Costs and revenues that differ among alternatives.
Example: You have a job paying Rs.1,500 per month in your hometown. You have a job offer in a neighboring city that pays Rs.2,000 per month. The commuting cost to the city is Rs.300 per month.
Differential revenue is: Rs.2,000 – Rs.1,500 = Rs.500
Differential cost is: Rs.300
Quick Check
Suppose you are trying to decide whether to drive or take the train to Mumbai to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the pizza you ate last night relevant in this decision? In other words, should the cost of the pizza affect the decision of whether you drive or take the train to Mumbai?
A. Yes, the cost of the pizza is relevant.
B. No, the cost of the pizza is not relevant.
Quick Check
Suppose you are trying to decide whether to drive or take the train to Mumbai to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the pizza you ate last night relevant in this decision? In other words, should the cost of the pizza affect the decision of whether you drive or take the train to Mumbai?
A. Yes, the cost of the pizza is relevant.
B. No, the cost of the pizza is not relevant.
Quick Check
Suppose you are trying to decide whether to drive or take the train to Mumbai to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Mumbai?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
Quick Check
Suppose you are trying to decide whether to drive or take the train to Mumbai to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Mumbai?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
Quick Check
Suppose you are trying to decide whether to drive or take the train to Mumbai to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
Quick Check
Suppose you are trying to decide whether to drive or take the train to Mumbai to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
Quick Check
Suppose you are trying to decide whether to drive or take the train to Mumbai to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the depreciation on your car relevant in this decision?
A. Yes, the depreciation is relevant.
B. No, the depreciation is not relevant.
Quick Check
Suppose you are trying to decide whether to drive or take the train to Mumbai to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the depreciation on your car relevant in this decision?
A. Yes, the depreciation is relevant.
B. No, the depreciation is not relevant.
Depreciation thatis a function of miles driven
would be relevant.
Depreciation that is a function of the passage of
time would not be relevant.
Classification Of Cost
10 Other Costs
Conversion Costs
AvoidableCosts
Unavoidable Costs
TIME FOR QUESTIONS
