Rayat Shikshan Sanstha’s S. M Rayat Shikshan Sanstha’s S.M.JOSHI COLLEGE, HADAPSAR, PUNE - 411028 Department of Commerce Prof. Gulave R.G.

CLASSIFICATION OF COST Elements Behavior Functions Normality Control Decision Making

Elements MATERIAL LABOUR EXPENSES

MATERIAL Direct: traceable to one particular process, job or product – identified with each unit of product Example: manufacturing an apparel Cloth, collar, buttons, cufflinks, thread Primary packing material (e.g., carton, wrapping, cardboard, boxes, etc.) Fuel, lubricating oil etc for operating & maintenance of machine Small tools Materials used for repairs & maintenance

Internal transport staff Storekeeper, maintenance staff LABOUR Inspectors Supervisors Internal transport staff Storekeeper, maintenance staff

Expenses leading to a job or contract Traveling expenses for negotiation Special pattern, design Special tools for executing the contract Rent Insurance Canteen, hospital, power , lighting, maintenance

Behavior Fixed Variable Semi-variable in short run & long run Varies with volume and constant per unit Semi-variable A cost could be variable for one level of activity whereas it could be fixed for another. Not inherently fixed or variable Many costs are semi-variable in nature

Functions Production Cost Administration Cost Selling Cost Distribution Cost

Normality Normal Abnormal

Control Controllable & Uncontrollable

Planning & Control Budgeted Cost: estimate of expenditure for different business operations Standard Cost: for prescribed set of operating conditions, labour, material and overheads are predetermined; budget translated into actual operation through standard costs

Decision Making Marginal vs. Absorption Costing (with fixed cost and without FC) Sunk - irrelevant Committed – pre committed Opportunity Incremental / Differential Avoidable & Unavoidable controllable / uncontrollable

Relevance Relevant Irrelevant

Cont….. Irrelevant cost: not relevant for decision making Example: Sunk costs: Sunk cost is the cost of abandoned plant less salvage value. Not relevant for decision making. Imputed (Notional cost): Actually not incurred (interest on own capital, rent on owned building, etc.) Taken into account in capital budgeting decisions. Replacement cost: Cost of replacing at current market price.

Ex. – Rent of factory is unavoidable if a product is discontinued. Avoidable and unavoidable cost: Cost that can be avoided by eliminating a product or department is avoidable and that which cannot be, is unavoidable. Ex. – Rent of factory is unavoidable if a product is discontinued.

Other costs: Future costs: cost to be incurred in future Programmed cost: Cost incurred as per policy of top management. Ex.- Donation to charity. Joint cost: cost of joint or by-products incurred before separation, which cannot be traced to particular products. Conversion cost: cost of converting raw material to finished goods = Production cost- direct material. Discretionary cost: not essential for decision on hand. Ex.- Training expenses of workers, R&D cost. Committed cost: Costs incurred due to past decisions and are not within control in the short run at present. Ex.- Depreciation on Plant, Rent, etc.