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CLASSIFICATION OF COST

Comparing Merchandising
and Manufacturing Activities

Merchandisers . . . Manufacturers . . .
 Buy finished  Buy raw materials.
goods.  Produce and sell
 Sell finished goods. finished goods.

Shoppers Stop
Classification Of Cost

1. According To Nature
2. According to function
3. According To Identifiably
4. According To Behavior
5. According Association With Products
6. According to Controllability
7. According To Normality
8. According To Time
9. According To Relevance and
10.Other Costs
Classification Of Cost

1. According To Nature Or Elements

Materials Labour
Expenses
Cost Cost
Cost Elements

Materials Labour Expenses


Classification Of Cost

2 According to functions

Production Selling &


Cost Distribution
Cost

Administration
Cost
RD Cost
Classification Of Cost

3 According To Identifiably

Direct Indirect
Direct Costs and Indirect
Costs
Direct costs Indirect costs
Costs that can be Costs cannot be easily
easily and conveniently and conveniently traced
traced to a unit of to a unit of product or
product or other cost other cost object.
objective. Example:
Examples: direct manufacturing
material and direct labor overhead
Manufacturing Costs

Direct Direct Manufacturing


Materials Labor Overhead

The Product
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

Semi-Fixed
Fixed Variable 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
Total materials bill

Materials used
Variable Cost Per Unit

Per unit materials cost will remain constant

Per Unit Cost

Materials Cost
Total Fixed Cost
Your fixed cost probably does not change
when you makeproduction.
Monthly Basic T Bill

Total production
Fixed Cost Per Unit
The average fixed cost per unit decreases as
more production is made.

Monthly Basic Bill per unit

production
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 remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Fixed cost per unit goes
the 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 
The royalties
Which of on
theticket sales is costs
following directly would
related to
bethevariable
number of
tickets sold.
with respect to the number of people who buy a
The cost of cleaning up MAY also be variable if the theater pays
ticket forcrews
cleaning a showby theathour.
a movie theater?
The more (There
tickets sold would
may be more
increase than
the time onetake
it would correct answer.)
to clean up the theater.

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.
Classification Of Cost

5 According to Association With Products

Product Period
Costs Costs
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

Controllable Uncontrollable
Costs Costs
Classification Of Cost

7 According To Normality

Abnormal
Normal
Costs
Costs
Classification Of Cost

8 According To Time

Historical Pre-determined
Costs Costs
Classification Of Cost

9 According To Relevance
Opportunity Cost
Relevant Cost
Sunk Cost
Shut Down Cost
Differential Cost
Imputed Cost
Out-Of-Pocket Cost
Marginal Cost
Replacement Cost
Opportunity Costs
The potential benefit that is
given up when one alternative
is selected over another.

Example: If you were


not attending college,
you could be earning
Rs.15,000 per year.
Your opportunity cost
of 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 Depreciation
to Mumbai tothat attend a
concert. You have is aample cash
function to do driven
of miles either, but
you don’t want to waste money
would needlessly. Is
be relevant.
the depreciation on your car relevant in this
decision?
Depreciation
A. Yes, the depreciation that is a
is relevant.
function
B. No, the depreciation of the
is not passage of
relevant.
time would not be relevant.
Classification Of Cost

10 Other Costs

Avoidable
Costs
Conversion
Costs Unavoidable
Costs
TIME FOR QUESTIONS