TMI BlogClassification of costX X X X Extracts X X X X X X X X Extracts X X X X ..... ent and uniform basis with a view to effect the comparability of the same of an enterprise with that of previous periods and of other enterprises. 2.2 The classification and its disclosure are aimed at providing better transparency in the cost statement. 2.3 The standard is also for better adoption of Uniform Costing and Inter-firm Comparison. 3. Scope 3.1 The standard on classification of cost should be applied in assessment of cost of a product or service, application of costing technique and in case of management decision making by the manufacturing industries in India. 3.2 The standard is to be followed by an enterprise, whether covered under section 209(1)(d) of the Companies Act,1956 or not, to classify cost in order to prepare cost statement on uniform basis to make it relevant and understandable for effective cost management. 3.3 The standard has also to be followed for the purpose of assessment of cost of production or valuation of product or the valuation of stock to be certified for calculation of duties and taxes, tariffs and other purposes as the case may be. The cost statement prepared based on standard will be used for assessment of excise duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iv) Behaviour fixed, semi-variable or variable (v) Management decision making (vi) Production Process (vii) Time period 5.5 Classification of cost is the process of grouping the components of cost under a common designation on the basis of similarities of nature, attributes or relations. It is the process of identification of each item and the systematic placement of like items together according to their common features. Items grouped together under common heads may be further classified according to their fundamental differences. The same costs may appear in several different classifications depending on the purpose of classification. 5.6 Cost is classified normally in terms of a managerial objective. Its presentation normally requires sub-classification. Such sub-classification may be according to nature of the cost elements, functional lines, areas of responsibility, or some other useful break-up. The appropriate sub-classification depends upon the uses to be made of the cost report. 6. Classification of Costs 6.1 By Nature of expense: 6.1.1 Costs should be gathered together in their natural groupings such as material, labour and other expenses. Items ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice form the direct material cost. Direct Material cost includes cost of procurement, freight inwards, taxes duties, insurance etc. directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks, refunds on account of modvat, cenvat, salex tax and other similar items are deducted in determining the costs of direct material. 6.2.5 Direct Labour Cost is the cost of wages of those workers who are readily identified or linked with a cost centre or cost object. 6.2.6 Here, the wages of the workers include the fringe benefits include all fringe benefits like Provident Fund contribution, gratuity, ESI, overtime, incentives, bonus , ex gratia, leave encashment, wages for holidays and idle time etc. for the purpose of calculation of direct labour cost. 6.2.7 Direct Expenses are the expenses other than direct material or direct labour which can be identified or linked with the cost centre or cost object. 6.2.8 Examples of direct expenses are l expenses for special moulds required in a particular cost centre l hiring charges for tools and equipments for a cost centre l royalties in connection to a product l Job processing charges etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hone, stationery, postage etc. u bank charges u audit fees u legal expenses u depreciation repair and maintenance of office building etc. 6.3.7 Selling costs are indirect costs related to selling of products or services and include all indirect cost in sales management for the organization. 6.3.8 Selling costs include all costs relating to regular sales and sales promotion activities. Examples of expenses which are included in selling cost are : u Salaries, commission and travelling expenses for sales personnel u advertisement cost u Legal expenses for debt realization u market research cost u royalty on sale u after sales service cost etc. 6.3.9 Distribution costs are the cost incurred in handling a product from the time it is completed in the works until it reaches the ultimate consumer. 6.3.10 Distribution costs are the costs incurred for distribution of product to customers. Examples of distribution costs: l Transportation cost l cost of warehousing salable products l cost of delivering the products to customers etc. Note 1. Primary packaging cost is included in production cost whereas secondar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in activity of an enterprise. These are also known as period costs. 6.4.3 Examples for fixed cost : salaries, rent, audit fees, depreciation etc. 6.4.4 Variable Cost is the cost of elements which tends to directly vary with the volume of activity. Variable cost has two parts (a) Variable direct cost; and (b) Variable indirect costs. Variable indirect costs are termed as variable overhead. 6.4.5 Examples of variable cost are materials consumed, direct labour, sales commission, utilities, freight, packing, etc. 6.4.6 Semi-Variable Costs contain both fixed and variable elements. They are partly affected by fluctuation in the level of activity. 6.4.7 Examples of semi-variable cost : Factory supervision, maintenance, power etc. Note: 1. The characteristics of fixed costs are (1) fixed amount within an output range (2) fixed cost per unit decreases with increased output 2. The characteristics of variable Cost: (1) The variable cost varies directly with volume of activities or production (2) variable cost remains constant per unit within a range of activity . 6.5 For Management Decision Making 6.5.1 Costs are classified for the purpose of management decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Differential cost (Rs. lakhs) Differential cost per unit (Rs.) (a) 1.00 - 30.00 - - (b)1.20 0.20 (b) (a) 35.00 5.00 25.00 (c) 0.80 0.20 (a) (c) 26.00 - 4.00 - 20.00 (+) Incremental cost (-) Decremental cost 6.5.7 Opportunity Cost is the value of the alternatives foregone by adopting a particular strategy or employing resources in specific manner. 6.5.8 It is the return expected from an investment other than the present one. The opportunity cost is considered for selection of a project or justification of investment, studying viability of an investment option. Example : A machine is currently being used to produce product P. It can also be used to produce product Q which can fetch ₹ 60,000 profit. Then the opportunity cost of using the machine is ₹ 60,000. 6.5.9 Replacement Cost is the cost of an asset in the current market for the purpose of replacement. 6.5.10 Rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered in the cost of production for decision making and charged to profit loss account. 6.5.21 Avoidable Costs are those costs which under given conditions of performance efficiency should not have been incurred. 6.5.22 Avoidable costs are logically associated with some activity or situation and are ascertained by the difference of actual cost with the happening of the situation and the normal cost. When spoilage occurs in manufacture in excess of normal limit, the resulting cost of spoilage is avoidable cost. Cost variances which are controllable may be termed as avoidable cost. 6.5.23 Unavoidable Costs are inescapable costs which are essentially to be incurred, within the limits or norms provided for. It is the cost that must be incurred under a programme of business restriction. It is fixed in nature and inescapable. 6.6 By nature of production process 6.6.1 Costs are also classified on the basis of nature of production or manufacturing process. 6.6.2 Batch Cost is the aggregate cost related to a cost unit which consist of a group of similar articles which maintain its identity throughout one or more stages of production. 6.6.3 Process cost : Whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.7.3 They are 'postmortem' costs ascertained after they have been incurred and they represent the cost of actual operational performance. Historical costing system follows a system of accounting to which all values (in revenue and capital accounts) are based on costs actually incurred or as relevant from time to time. 6.7.4 Pre-determined Costs for a product are computed in advance of production, on the basis of a specification of all the factors affecting cost and cost data. Pre-determined costs may be either standard or estimated. 6.7.5 Standard Costs: A pre-determined norm applied as a scale of reference for assessing actual cost, whether these are more or less. The standard cost serves as a basis of cost control and as a measure of productive efficiency when ultimately posed with an actual cost. It provides management with a medium by which the effectiveness of current results is measured and responsibility of deviation placed. 6.7.6 Standard costs are used to compare the actual costs with the standard cost with a view to determine the variances, if any, and analyse the causes of variances and take proper measure to control them. 6.7.7 Estimated Costs o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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