Cost Accounting Classification of Cost - Accounting Basics

How are the costs classified in cost accounting?

Based on the following attributes, costs are classified:

By Nature

By its nature, the cost is classified into material cost, labour cost and overheads cost which is further divided into raw material cost, consumables cost, packing costs etc.

By Degree of Traceability of the Product

On the grounds of degree of traceability, costs are divided into Direct and indirect costs. Direct expenses are those which directly attribute to a particular product. For instance, leather in shoe manufacturing is a direct expense and building rent, salaries are indirect expenses.

By Controllability

In this classification, two types of costs fall:

  • Controllable – The costs that can be controlled by the management such as material expenses, labour expense and direct expenses.
  • Uncontrollable – The costs that cannot be controlled by management such as rent, salaries and other indirect expenses.

By Relationship with Accounting Period

The period of use and benefit measures the classification such as capital expenditure and revenue expenditure. The current accounting period relates the revenue expenditure and the benefits beyond the accounting period refer to capital expenditure. Capital expenditure includes fixed assets and revenue expenditure includes maintenance of assets.

By Association with the Product

By associating with the products the costs are classified into:

  • Product cost – Product cost include direct material cost, direct labour cost and direct overhead cost. The costs of the product are transferred to cost of goods sold account.
  • Time/Period base cost – Time or period based expenditure are selling and administrative expenditure. For instance, building rent, employee’s salaries. Profitability and cost depend on both product cost and time/period cost.

By Functions

The costs are divided in accordance with its functions such as:

  • Production Cost – Production cost include the total manufacturing or the production cost.
  • Commercial cost – Commercial cost includes business expenses and sub-divided into administrator cost, selling and distribution cost.

By Change in Activity or Volume

Under this category, the cost is divided as fixed, variable, and semi-variable costs:

  • Fixed cost – Fixe cost relate to time or period. Irrespective of the volume of the production this cost remains unchanged such as rent, insurance etc. The per unit cost decrease if the production increases and the per unit cost increases if the production decreases. For instance, if the factory rent is Rs 25,000 per month and the number of units produced in that month is 25,000, then the cost of rent per unit will be Rs 1 per unit. In case the production increases to 50,000 units, then the cost of rent per unit will be Rs 0.50 per unit.
  • Variable cost – The cost directly associated with the unit cost is variable cost. In accordance with the volume of production, it either increases or decreases. Some of such variable costs are direct material and direct labour. Irrespective of the production of units, the variable cost per unit remains unchanged.
  • Semi-variable cost – Semi-variable cost is the cost, in which some portion of the cost remains fixed and the remaining portion is variable. For instance, the minimum electricity bill per month is Rs 5,000 for 1000 units and excess consumption, if any, is charged @ Rs 7.50 per unit. The total cost depends on the consumption of the units in excess of 1000 units.

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