CLASSIFICATION OF COSTS
1. By Nature
2. By Traceability
3. By Cost Behaviour
4. Production / Non Production (It is more a Financial Accounting Term than MA)
CLASSIFICATION BY NATURE
1. Material Cost (Tangible – which can be touched)
Cost of material used to produced a product
2. Labour Cost ( if we touch it, it touches u back)
Cost of persons who are involved in making product.
3. Other Cost (Expenses) (Not a material and labour cost, may be intangible)
Other costs: Power, Royalties, Utilities, Insurance etc
CLASSIFICATION BY TRACEABILITY
Easily link the cost to the product / identifying the cost to Product
1. Direct Cost (A Cost which CAN be associated directly and in full with the product)
Sum of direct costs is called Prime Cost
Prime Cost = Direct Material + Direct Labour + Direct Expense
2. Indirect Cost (A Cost which CANNOT be associated directly and in full with the product)
Sum of Indirect costs is called Overhead Cost
Overhead Cost = Indirect Material + Indirect Labour + Indirect Expense
CLASSIFICATION BY COST BEHAVIOUR
How do Cost changes with the change in Level of Activity
Level of Activity (LofA)(Volume) = No of Units Produced and sold
FIXED COST
A cost which remains constant in total terms as the level of activity changes.
There is no change in the Cost when the Level of Activity changes.
Total Cost | Fixed Cost (FC) |
FC in Total is a Constant | |
Level of Activity |
Unit Cost Cost / Unit
100 £500 £5
200 £500 £2.5
0 £500 ∞
VARIABLE COST
A cost which varies proportionately with level of activity.
Cost changes with change in Level of Activity.
Any change in Variable Cost is proportionate to the change in level of activity.
Total Cost | |
Level of Activity |
Cost / Unit | Variable Cost/Unit (VC/U) is a constant |
Level of Activity |
Unit Cost Cost / Unit
100 £500 £5
200 £1,000 £5
0 0 £5
Examples of Variable Cost
Direct material
Direct labour
Variable overheads
There is some relationship between Direct cost and Variable Cost but it is not always true because Indirect Cost may be variable cost.
There is some relationship between Indirect Cost and Fixed Cost but it is not always true because direct cost may be fixed cost.
SEMI – VARIABLE COST / SEMI – FIXED COST
A mix of fixed and variable cost.
Total Cost | Variable Cost |
Fixed Cost | |
Level of Activity |
Example of Semi – Variable
Power Cost - Standing Charge => Fixed Cost
- Usage => Variable Cost
Telephone - Connection charge => Fixed Cost
- Usage => Variable Cost
Total Cost = Fixed Cost + Variable Cost
STEP COST
A fixed Cost over a wider activity range.
Cost | ||||
Level of Activity | ||||
CLASSIFICATION INTO PRODUCTION AND NON PRODUCTION COST
It is mainly the topic of Financial Accounting. It most related to the valuation of goods produced.
PRODUCTION COST => Cost of Sales
Direct material costs
Direct labour costs
Factory Overheads
These costs can be associated / related to the product.
NON PRODUCTION COSTS => Expenses (Administration and Selling Cost)
