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Classification of cost

CAS - 01 - Rule - Companies Law - CAS - 01 - CAS - 1 The following is the text of the COST ACCOUNTING STANDARD 1 (CAS 1) issued by the Council of the Institute of Cost and Works Accountants of India on "". The standard deals with the principle of classifying costs in the cost statements. In this Standard, the standard portions have been set in bold italic type. These should be read in the context of the background material which has been set in normal type. 1. Introduction The standard .....

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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 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 .....

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s the case may be. The cost statement prepared based on standard will be used for assessment of excise duty and other taxes, anti-dumping measures, transfer pricing etc. 4. Definitions: 4.1 Cost : Cost is a measurement, in monetary terms, of the amount of resources used for the purpose of production of goods or rendering services. 4.2 Manufacturing of goods or rendering services involves consumption of resources. Cost is measured by the sacrifice made in terms of resources or price paid to acqui .....

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so be a budget centre. 4.4 Cost Centre or Cost Object is the logical sub-unit for collection of cost. Cost Centre may be of two types - personal and impersonal cost centers. Personal cost centre consists of a person or a group of persons. Cost centres which are not personal cost centres are impersonal cost centers. Again Cost centers may be divided into broad types i.e. Production Cost Centres and Service Cost Centres. Production Cost Centres are those which are engaged in production like Machin .....

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oups having regard to their nature (subjective classification) or purpose (objective classification). 5.2 Items should be classified by one characteristic for a specific purpose without ambiguity. 5.3 Scheme of classification should be such that every item of cost can be classified. 5.4 Basis of classification : (i) Nature of expense (ii) Relation to object - traceability (iii) Functions/activities (iv) Behaviour fixed, semi-variable or variable (v) Management decision making (vi) Production Pro .....

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rpose 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. s 6.1 By Nature of expense: 6.1.1 Costs should be gathered together in their natural groupings such as material, l .....

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efunds on account of modvat, cenvat, salex tax and other similar items are deducted in determining the costs of material. 6.1.4 Labour Cost means the payment made to the employees, permanent or temporary, for their services. 6.1.5 Labour cost include salaries and wages paid to permanent employees, temporary employees and also to employees of the contractor. Here, salaries & wages include all fringe benefits like Provident Fund contribution, gratuity, ESI, overtime, incentives, bonus, ex-grat .....

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le way then it is called direct otherwise the cost component will be termed as indirect. According to this criteria for classification, material cost is divided into direct material cost and indirect material cost, labour cost into direct labour cost and indirect labour cost and expenses into direct expenses and indirect expenses. Indirect cost is also known as overhead. 6.2.2 Direct cost has three components direct material cost, direct labour cost and direct expenses and indirect cost has thre .....

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; 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, .....

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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 small value and cannot be identified in or allocated to a product/service are classified as indirect materials. Examples: l Consumable spares and parts l Lubricants etc. 6.2.11 Indirect labour cost is the wages of the employees which are not directly allocable to a particular cost centre .....

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for which the elements are used into the following four major functions : Production; Administration; Selling; Distribution; and Research & Development Expenditure. 6.3.2 Production Cost is the cost of all items involved in the production of a product or service. It includes all direct costs and all indirect costs related to the production (Exhibit 1) 6.3.3 Production overhead is the indirect costs involved in the production process. 6.3.4 Production overhead is also termed as factory overhe .....

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incurred for general management of an organization. These are in the nature of indirect costs and are also termed as administrative overhead. 6.3.6 Examples of items to be included in Administrative overhead : u Salaries of administrative and accounts staff u general office expenses like rent, lighting, rates and taxes, telephone, 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 indir .....

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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 excepti .....

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, develop a new product, market research etc. and commercialization thereof. 6.3.12 Research Cost comprises the cost of development of new product and manufacturing process; improvement of existing products, process and equipment; finding new uses for known products; solving technical problem arising in manufacture and application of products etc. Development cost includes the cost incurred for commercialization/implementation of research findings. Exhibit 1 (1) Direct Material Cost (a) (2) Dire .....

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losing stock of work-in-progress & finished goods. 6.4 By Behaviour 6.4.1 Costs are classified based on behaviour as fixed cost, variable cost and semi-variable cost depending upon response to the changes in the activity levels. 6.4.2 Fixed Cost is the cost which does not vary with the change in the volume of activity in the short run. These costs are not affected by temporary fluctuation in activity of an enterprise. These are also known as period costs. 6.4.3 Examples for fixed cost : sala .....

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ted 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 .....

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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 4.80 - 4. Variable Production & Selling overhead 2.30 5. Semi-variable Cost 3.20 2.00 (after segregation fixed and variable part) C. Total Marginal Cost 11.25 .....

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evels of activities is the differential cost. When the level of activity is increased, the differential cost is known as incremental cost and when the level of activity is decreased, the decrease in cost is known as decremental cost. Output Unit in Lakhs Differential Unit in lakhs Total Cost (Rs. lakhs) 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 (-) Dec .....

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77; 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 Replacement cost is generally used for determining the optimum time of replacement of an equipment or machine in consideration of maintenance cost of the existing one and its productive capacity. 6.5.11 Relevant Costs are costs relevant for a specific purpose or situation. 6.5.12 In the context of decision .....

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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. .....

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output in the conditions in which that level of output is achieved. 6.5.18 Normal cost includes those items of cost which occur in the normal situation of production process or in the normal environment of the business. The normal idle time is to be included in the ascertainment of normal cost. 6.5.19 Abnormal Cost is an unusual or a typical cost whose occurrence is usually irregular and unexpected and due to some abnormal situation of the production. 6.5.20 Abnormal cost arises due to idle time .....

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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 .....

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by number of units produced in the process during the period. 6.6.4 Accounts are maintained for cost of a process for a period. The average cost per unit produced during the period is process cost per unit. 6.6.5 Operation Cost is the cost a specific operation involved in a production 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 incur .....

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nge 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 termed as by-products and th .....

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g ways: 6.7.2 Historical Costs are the actual costs of acquiring assets or producing goods or services. 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 .....

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