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TMI BlogClassification of costX X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and other taxes, anti-dumping me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking (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 of costs differ on the basis of their nature. The elements of cost can be classified in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 6.2.9 Indirect Material is the cost of material which cannot be directly allocable to a particular cost centre or cost object. 6.2.10 Materials which are of sm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 secondary packaging cost is distribution cost. 2. In exceptional cases, for example in case of heavy industries equipment supply, installation cost at delivery site for heavy equipments which involves assembling of parts, testing etc. is included in production cost but not distribution cost. For example. installation cost of a gas t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ics 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 decision making under different circumstances as under : 6.5.2 Marginal cost is the aggregate of variable costs, i.e. prime cost plus variable overhead. Marginal cost per unit is the change in the amount at any given volume of output by which the aggregate cost changes if the volume of output is increased or decreased by one unit. 6.5.3 Marginal cost is used in Marginal Costing system. For determining marginal cost, semi-variable costs, if any, are segregated into fixed and variable cost. Then, variable costs plus the variable part of semi-variable costs is the total marginal cost for the volume of production in consideration. Example: A. Production 45,000 units Fixed Cost Variable Cost B. Cost Rs. lakhs Rs. lakhs 1. Material cost 4.50 2. Labour cost 2.45 3. Fixed Cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making situation. For example, present depreciated cost of machine is relevant in case of decision of its sale but it is irrelevant in case of decision of its replacement. 6.5.13 Imputed Costs are hypothetical or notional costs, not involving cash outlay, computed only for the purpose of decision making. 6.5.14 In economics, 'imputed' indicates an ascribed or estimated value when there is no criteria of absolute monetary value for such purpose. In national income estimation wages of housewives are imputed. Similarly, in farming operations, the wages or salaries of owner are imputed. Imputed costs are similar to opportunity costs. Interest on internally generated fund, which is not actually paid is an example of imputed cost. 6.5.15 Sunk Costs are historical costs which are incurred i.e. 'sunk' in the past and are not relevant to the particular decision making problem being considered. 6.5.16 Sunk costs are those that have been incurred for a project and which will not be recovered if the project is terminated. While considering the replacement of a plant, the depreciated book value of the old asset is irrelevant as the amount is a sunk cost which is to be writte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion process or business activity. 6.6.6 When there are distinctly separate operations involved in a process, cost for each operation is found out for effective control mechanism. 6.6.7 Operating Cost is the cost incurred in conducting a business activity. Operating costs refer to the cost of undertakings which do not manufacture any product but which provide services. 6.6.8 Contract cost is the cost of a contract with some terms and condition of adjustment agreed upon between the contractee and the contractor. 6.6.9 Contract cost usually implied to major long term contracts as distinct from short term job costs. Escalation clause are sometimes provided in the contract in order to take care of anticipated change in material price, labour cost etc. 6.6.10 Joint Costs are the common cost of facilities or services employed in the output of two or more simultaneously produced or otherwise closely related operations, commodities or services. 6.6.11 When a production process is such that from a set of same input, two or more distinguishably different products are produced together, products of greater importance are termed as joint products and products of minor importance are term ..... X X X X Extracts X X X X X X X X Extracts X X X X
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