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

2. CLASSIFICATION OF COST
Elements
Behavior
Functions
Normality
Control
Decision Making

3. Elements
MATERIAL
LABOUR
EXPENSES

4. 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

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

6. 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

7. 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

8. Functions Production Cost Administration Cost Selling Cost
Distribution Cost

9. Normality
Normal
Abnormal

10. Control
Controllable
&
Uncontrollable

11. 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

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

13. Relevance
Relevant
Irrelevant

14. 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.

15. 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.

16. 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.