Cost Accounting – Classification of Costs
Cost accounting refers to a process of accumulating, recording, classifying and analyzing all costs incurred at various levels of production. The purpose of cost accounting is manifold. It provides a final selling price, suggests the best possible course of action where maximum savings are possible and a strategy for future. Cost accounting is also constructive in comparing the input and output results that ultimately aids the management to arrive at a financial statement. It includes tangible as well as the intangible expenses.
Let us look at the various methods of cost classification. 1. By element- On the basis of element, cost is divided into three categories- a)Material- It is one of the most important aspects of production. It is also referred to as raw material or tangible items. Almost 50% of the cost comes under material. For example- cotton, wood, rubber, etc. b)Labour- Obtaining finished products from raw material solely depends on labour.
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Cost of labour is calculated in the form of wages and salaries.
Expenses- Expenses other than material and labour come under the category of ‘expenses’. For example- rent, insurance, etc. 2. By nature/traceability- On the basis of traceability, cost is divided into two categories- a)Direct/traceable cost- It refers to those costs that are easily traceable or identifiable. For example- wages, salary, cost of timber, cotton, etc. b)Indirect/untraceable cost- It refers to those costs that are not easily traceable of identifiable. For example- lubricants, cotton wastes, insurance, etc. 3.
By function- On the basis of function, cost may be divided into four categories- a)Production cost- Cost incurred in obtaining finished goods from raw material is referred to as the production cost. b)Administration cost- It includes the cost of strategizing policies, leading the organization, and carrying out the operations. c)Selling cost- The cost incurred on marketing for promotion of sales is called selling cost. d)Distribution cost- The cost incurred on distribution of finished products is called distribution cost. 4.
By behavior- On the basis of behavior, cost can be divided into two categories- a)Fixed cost- Fixed cost is the cost that remains the same irrespective of the size of production. For example- rent, insurance, etc. b)Variable cost- Variable cost is the cost that changes with respect to change in the size of production. For example- material, wages, etc. 5. By control controllability- On the basis of controllability, cost can be divided into two categories- a)Controllable- Cost that can be controlled by the members of an undertaking b)Uncontrollable- Cost that cannot be controlled by the members of an undertaking 6.
By normality- On the basis of normality, cost is divided into two categories- a)Normal cost- It is the cost incurred on regular day to day activities b)Abnormal cost- It is the cost incurred on abnormal events taking place during business operations 7. By time- On the basis of time, cost is divided into two categories- a)Historical cost- It is the cost incurred in the past b)Predetermined cost- It is the cost that is determined before the production process is completed