Cost classification
---
🔹 1. By Nature or Elements (Analytical Classification)
Costs are classified into three basic elements:
Material Cost: Cost of raw materials used in production.
E.g., cotton in textile industry.
Labour Cost: Wages paid to workers directly or indirectly involved in production.
E.g., machine operators, supervisors.
Expenses: All other costs which are neither material nor labour.
E.g., electricity, factory rent, depreciation.
---
🔹 2. By Functions (Functional Classification)
Costs are divided based on business functions:
Manufacturing/Production Cost: Cost involved in converting raw material into finished goods.
E.g., raw materials, wages, factory overheads.
Administration Cost: Costs related to office work and management.
E.g., office salaries, stationery.
Selling Cost: Costs incurred to sell the product.
E.g., advertisement, sales commission.
Distribution Cost: Costs to deliver product to customer.
E.g., packaging, transportation.
---
🔹 3. By Degree of Traceability to Product
Direct Cost: Easily traced to a product.
E.g., direct material, direct labour.
Indirect Cost: Not directly traceable, incurred for more than one product or process.
E.g., rent of factory, manager’s salary.
---
🔹 4. By Changes in Activity or Volume
Fixed Cost: Remains constant regardless of production level.
E.g., factory rent ₹10,000/month.
Variable Cost: Changes directly with output.
E.g., cost of raw material ₹5 per unit.
Semi-variable Cost: Partly fixed, partly variable.
E.g., telephone bill ₹500 fixed + ₹2 per call.
Step Cost: Constant for a range but increases step-wise after a point.
E.g., hiring 1 new supervisor after every 100 workers.
---
🔹 5. By Controllability
Controllable Costs: Can be influenced by a person at a certain level.
E.g., raw material wastage by storekeeper.
Uncontrollable Costs: Cannot be influenced at that level.
E.g., factory rent by floor manager.
---
🔹 6. By Normality
Normal Cost: Incurred under normal operating conditions.
E.g., regular power consumption.
Abnormal Cost: Unexpected or unusual.
E.g., cost due to fire or flood.
---
🔹 7. By Accounting Period (Capital & Revenue)
Capital Cost: Gives long-term benefit.
E.g., cost of new machinery.
Revenue Cost: Day-to-day expenses, benefit used within same period.
E.g., wages, raw materials.
---
🔹 8. By Time
Historical Cost: Already incurred, recorded in books.
E.g., cost in previous month’s ledger.
Predetermined Cost: Estimated in advance for planning or budgeting.
E.g., standard cost, budgeted cost.
---
🔹 9. By Planning and Control
Budgeted Cost: Total estimated cost for the business or department.
E.g., monthly marketing budget ₹20,000.
Standard Cost: Scientifically set cost for a product or process.
E.g., ideal material cost = ₹7/kg.
---
🔹 10. By Association with Product
Product Cost: Directly related to production; added to inventory.
E.g., raw materials, direct labour.
Period Cost: Not related to production; charged to current period.
E.g., office rent, admin salaries.
---
🔹 11. For Managerial Decisions
Marginal Cost: Extra cost to produce one more unit.
E.g., ₹5 extra for each additional unit.
Out-of-Pocket Cost: Involves actual cash payment.
E.g., wages, rent paid in cash.
Differential Cost: Cost difference between two alternatives.
E.g., cost of producing vs. buying.
---
🔹 Other Important Classifications
🔸 (a) Replacement Cost
Current cost to replace an existing asset.
E.g., new machine price today.
🔸 (b) Sunk Cost
Already incurred, cannot be recovered.
E.g., cost of a machine that is now obsolete.
🔸 (c) Imputed (Notional) Cost
Hypothetical cost with no actual payment.
E.g., rent of own building used in business.
🔸 (d) Opportunity Cost
Profit lost when choosing one option over another.
E.g., using capital in business vs. investing in FD.
🔸 (e) Avoidable & Unavoidable Cost
Avoidable: Can be removed if activity stops.
E.g., wages of a discontinued department.
Unavoidable: Cannot be avoided.
E.g., manager’s salary even if product is stopped.
🔸 (f) Explicit Cost
Recorded in books, involves cash outflow.
E.g., wages, rent.
🔸 (g) Implicit Cost
Not recorded, no cash flow but still a cost.
E.g., depreciation, owner’s unpaid work.
🔸 (h) Engineered Cost
Costs with a direct, measurable relation to output.
E.g., materials for each unit produced.
---