CLASSIFICATION OF Dr.

Ashok Panigrahi
COSTS
 MEANING OF COST
Cost is the expenditure incurred to produce and sell products and
services, or to acquire assets.
Cost vs. Price: Cost is typically the expense incurred for making a
product or service that is sold by a company. Price is the amount a
customer is willing to pay for a product or service.
Cost vs. Expenses : Cost refers to the cost of production and
operations. Expense refers to fixed monthly expenses such as
rent, utilities, and other fixed expenses.
Example: Money paid to purchase a car is its Cost, but the amount
paid to purchase fuel for its regular running is an expenses.
1. BY ELEMENT

Material Cost

Labour Cost

Expenses
 MATERIAL COST
Cost of materials used for the manufacture of a product, a
particular work order, or provision of a service.
Example: Cloth for making a dress, stores used for maintaining
machines and buildings such as lubricants, cotton waste, bricks etc.
 LABOUR COST
Labour cost is defined as the total expenditure borne by
employers in order to employ workers. Labour costs include
the direct costs linked to remuneration for work carried out
such as direct remuneration, bonuses and ex gratia payments
not paid at each pay period, payments for days not worked,
severance pay, benefits in kind. They also include indirect costs
linked to employees, independently of the remuneration paid
by the employer, such as direct social benefits, vocational
training costs and so on.
 EXPENSES
Expense is defined as money expended or cost incurred in a firm's
efforts to generate revenue, representing cost of doing business.
They may be in the form of actual cash payments (such as wages
and salaries), a computed 'expired' portion (depreciation) of an
asset, or an amount taken out of the firm's earnings (such as bad
debts).
Whereas all expenses are costs, not all costs (such as those
incurred in acquisition of income generating assets) are expenses.
2. BY FUNCTIONS

1. Production 2. Selling Cost 3. Distribution

4. 5. Research 6.
Administrative Cost Development
Cost Cost

7. Pre- 8. Conversion
production Cost 9. Product Cost
Cost
 PRODUCTION COST
The cost of the sequence of operations which begins with supplying
materials, labour and services and ends with primary packing of
the product. Thus it includes the cost of direct materials, direct
labour, direct expenses and factory overheads.
 SELLING COST
The cost seeking to create and stimulate demand (sometimes
termed ‘marketing’) and of securing orders.
DISTRIBUTION COST
The cost of the sequence of operations which begins with
making the packed product available for dispatch and
ends with making the reconditioned returned empty
package, if any available for re-use.
It also includes expenditure incurred in transporting articles
to central or local storage as well as in moving articles to
and from prospective customers as in case of goods on sale
or return basis. In gas, electricity and water industry
distribution means pipes, mains and services which may be
regarded as the equivalent of packing and transportation.
 ADMINISTRATIVE COST
The cost of formulating the policy, directing the organization and
controlling the operations of an undertaking which is not related
directly to a production, selling & distribution, research or
development activity or function.
 RESEARCH COST
The cost of researching for new or improved products, new
applications of materials, or improved methods.
 DEVELOPMENT COST
The cost of the process which begins with the implementation of a
decision to produce a new or improved product or to employ a
new or improved method and ends with commencement of formal
production of that product or by that method.
 PRE-PRODUCTION COST
The part of development cost incurred in making a trial production
run preliminary to formal product.
This term is sometimes used to cover all activities prior to
production including Research & Development, but in such cases the
usage should be made clear in the context.
 CONVERSION COST
The sum of direct wages, direct expenses and overhead cost of
converting raw materials to the finished stage or converting a
material from one stage of production to the next.
In some cases this also includes any excess material cost or loss of
material incurred at the particular stage of production.
 PRODUCT COST
These are inventory related cost. These are the costs which are
assigned to the product. Under marginal costing variable
manufacturing cost and under absorption costing, total
manufacturing cost constitutes product cost.
3. BY NATURE/IDENTIFIABLY

Direct Cost

Indirect Cost
 DIRECT COST
The expenses on material and labour economically and easily
traceable to a product, service or job are considered as direct
costs. In the process of manufacture or production of articles,
materials are purchased, labourers are employed and the wages
are paid to them, certain other expenses are also incurred directly.
Since all these take an active and direct part in the manufacture of
a particular commodity, hence are called direct costs.
Example: Cost of bread in a burger
 INDIRECT COST
The expenses incurred on those items which are not directly
chargeable to production are known as indirect costs. Example: In
production, salaries of timekeepers, storekeepers, foremen are
paid, certain expenses for running the administration are incurred.
All of these cannot be conveniently allocated to production and
hence are called indirect costs.
4. BY VARIABILITY/BEHAVIOUR

Fixed Cost
Variable Cost
Semi-variable Cost
Step Cost
 FIXED COST
The cost which does not vary but remains constant within a given
period of time and range of activity in spite of the fluctuations in
production, is known as fixed cost. Example: rent, insurance of factory
buildings etc. remain the same for different levels of production.
 VARIABLE COST
These costs tend to vary with the volume of output. Any increase in
the volume of production results in an increase in the variable cost
and vice versa.
Example: cost of material, cost of labour etc.
 SEMI-VARIABLE COST
The cost which does not vary proportionately but simultaneously
cannot remain fixed at all times is known as semi variable cost. It
can also be called as semi-fixed cost.
Example: Depreciation, repairs etc.
STEP COSTS
Fixed cost can be further classified into committed fixed
costs and discretionary fixed costs.
Committed fixed costs are unavoidable in the short term if
the organization has to function. Examples are
depreciation, rent, pay etc,
Discretionary fixed costs are those which are set at a fixed
amount for specific time periods by management .
Examples are research and development costs,
advertisement and market research expenses
 STEP COSTS
Certain costs remain fixed over a range of activity and then jump
to a new level as activity changes. Such costs are treated as “Step
Costs”.
Example: A foreman is in a position to supervise a given number of
employees. Beyond this number it will be necessary to hire a
second then a third and so on.
5. BY CONTROLLABILITY

Controllable Costs

Uncontrollable
costs
 CONTROLLABLE COSTS
These are the costs which can be influenced by the action of a
specified member of an undertaking. A business organization is
usually divided into a number of responsibility centres and each
centre is headed by an executive. The executive can thus control
the costs incurred in that particular responsibility centre.
 UNCONTROLLABLE COSTS
Costs which cannot be influenced by the action of a specified
member of an undertaking.
Example: Expenditure incurred by the tool room is controllable by
the foreman in charge of that section but the share of the tool
room expenditure which is apportioned to a machine shop is not to
be controlled by the machine shop foreman.
6. BY NORMALITY

Normal Costs

Abnormal costs
 NORMAL COSTS
It is the cost which is normally incurred at a given level of output
under the conditions in which that level of output is normally
attained.

ABNORMAL COSTS
It is the cost which is not normally incurred at a given level of
output in the conditions in which that level of output is normally
attained. This is charged to Costing P&L A/c
 [Link] Classification by Time
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 and 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 cost.
Standard Cost: An actual cost which is pre-determined as per certain
norms and guidelines to provide as a base for cost control, is termed as a
standard cost.
Estimated Cost: The cost of business operation presumed on the grounds
of experience is known as an estimated cost. It is merely based on
assumptions and therefore considered to be less accurate to determine
the actual cost.
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