CLASSIFICATION OF COSTS

Presented By : VARUN NAGPAL 185

CONCEPT OF COST
In general, COST means the amount of expenditure (actual or notional) incurred on, or attributable to a given thing. However, the term cost cannot be exactly defined. Its interpretation depends upon : (a) the nature of business or industry, and (b) the context in which it is used.

CLASSIFICATION
Fixed, Variable and Semi-variable Costs
The cost which varies directly in proportion to every increase or decrease in the volume of output or production is known as VARIABLE COST. For Examples: wages of labourers, cost of material, power, etc.

The cost which does not vary but remains constant within a given period of time and range of activity in spite of the fluctuations in production, is known as FIXED COST. For Examples: rent or rates, insurance charges, etc. The cost which does not vary proportionately but simultaneously cannot remain stationary at all times is known as SEMI-VARIABLE COST. For Examples: depreciation, repairs, etc.

Product Costs and Period Costs

Costs which become part of the cost of the product rather than an expense of the period in which they are incurred are called as PRODUCT COSTS. These costs may be fixed as well as variable. For Examples: cost of raw materials, wages, etc. Costs which are not associated with production are called PERIOD COSTS. They are treated as an expense of the period in which they are incurred. For Example: salesmen salaries and commissions (that comes periodically).

Direct and Indirect Costs

The expenses on material and labour, and those that are easily traceable to a product, service or job are considered as DIRECT COSTS. For Examples: raw material, wages, and certain other expenses that take direct part in the manufacturing of a particular commodity.

The expenses incurred on those items which are not directly chargeable to production are known as INDIRECT COSTS.

Controllable and uncontrollable costs

CONTROLLABLE COSTS are those costs which can be influenced by the action of a specified member of the undertaking. Costs which cannot be so influenced are termed as UNCONTROLLABLE COSTS.

Shutdown Costs and Sunk Costs

An organisation may have to suspend its operations for a period on account of some tempoarary difficulties , e.g., shortage of raw material, non availability of requisite labour, etc. During this period though no work is done yet certain fixed costs, such as,

rent and insurance of building, etc., will be incurred, such costs are known as SHUTDOWN COSTS. SUNK COSTS are historical, these are costs which have been created by a decision that was made in the past that cannot be changed by any decision that will be made in future.

Opportunity Costs
OPPORTUNITY COST is the cost of an activity measured in terms of the value of the best alternative that is not chosen (that is foregone). It is the sacrifice related to the second best choice available. For example: The opportunity cost of going to college is the money we would have earned if we worked instead. On the one hand, we lose four years of salary while getting our degree.

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