COST CLASIFICATION

Cost classification is a process where cost are grouped together according to their common
characteristic. Classification can be by nature, by purpose or by responsibility.

COT CLASFICATION FOR INVENTORY VALUATION AND PROFIT MEASUREMENT

1.1 COST ELEMENT:

 Material
 Labour
 Other expenses

Cost element can be classified as direct cost or indirect cost

DIRECT MATERIAL +DIRECT LABOUR +DIRECT EXPENSES= PRIME COST

Direct Material

Is part of the all material becoming the product and direct material cost are charged to the cost of a
product as a prime cost e.g component parts, part finished work and primary packing materials.

Direct wage or direct Labour cost

These are all wage paid for labor e.g basic hours, overtime. Direct wage cost are charged to the product
as part of prime cost.

Direct expenses

Are any expenses which are incurred on the specific product other than direct wage and direct wage
and are known as chargeable expenses? Direct expenses are charged to the product as part of prime
cost for example cost of special design.

Indirect Cost/ overhead

These are cost incurred in a course of making a product, providing a service or running a department but
which cannot be traced directly and in full to the product, service or department e.g cost of a supervisor,
wages on production line cleaning material

TOTAL EXPENDITURE ANALYSIS

Material cost = direct material + indirect Material Cost

+ + +

Labour cost = direct labour cost + Indirect Labour Cost

+ + +

Expense = Direct Expense + Indirect expense

TOTAL COST = DIRECT COST/PRIME COST + OVERHEAD

PRODUCTION OVERHEAD

Production overhead include all indirect material cost ,indirect labour cost and indirect expenses
incurred in the factory from receipts of the order until completion

ADMINISTRATION OVERHEAD

This is all indirect material material cost, wage and expenses incurred in direction control and
administration of and undertaking. Eg depereciation , office salaries and rent , rates telephone, heat and
light cost.

SELLIING OVERHEAD

These are indirect material cost, wage and expenses incurred in promoting sales and retaining
customer.this include

A) Printing and stationary

B) Salaries and commission of sales repreatative
C) Advertising and sales promotion,
D) Rent rates and insurance for sales office and showroom

DISTRIBUTION OVERHEAD

This is all indirect material cost, wage and expense incurred in making the packed product readyfor
dispatch and delivering it to customer.eg cost of packing cases, wage of packers, depreciation and
running expense of delivery vehicle

1.2 PRODUCT COST AND PERIOD COST

Product cost are cost identified with goods produced or purchased for resale. Period cost are cost
deducted as expense during the current period
1.3 PRODUCTION AND NON PRODUCTION COST
Production cost are all the cost involved in the manufacturing of good and the cost consist of direct
material, direct labour and manufacturing overhead
Non production cost are taken directly to the income statement as expense in the period in which
they are incurred such cost consist of selling and administrative expenses.
1.4 FUNCTION COST
This involve relating the cost to the activity causing the cost. Under traditional costing system for
manufacturing cost are classified by function as follows
a):production or manufacturing cost
b): Administration cost
c): marketing or selling and distribution cost
 COST BEHAVIOR AND LEVEL OF ACTIVITIES

There are many factors which may influence cost. The major influence is volume of output or level of
activity. Level of activity may refer to the following

a) Number of unity produced

b) Volume of item sold
c) Number of invoice issued
d) Number of item sold

The basic principal of cost behavior are that as the level of activity rise, cost will usually rise

COST BEHAVIOR PATTERN

Cost are classified into fixed, variable,step fixed and semi variable and these cost behave in different
ways.

Fixed cost: this is the cost which is not affected by the level of activity and known as period cost

Cost (K)

Fixed cost

Volume of out put

2: Variable Cost: variable is cost which vary with the number of unitsproduced

Cost (K)

Variable cost

Volume of out put

2 :semi variable cost; semi variable cost is a cost which has both element of fixed cost and variable
cost.

cost (K)

Variable part

Fixed cost

Volume of output

3 Step Cost: is a cost whose fixed cost in nature but only within certain level of activity, it may appear as
variable or fixed

cost

Volume of out put

DETERMINING THE FIXED AND VARIABLE ELEMENT OF SEMI VARIABLE COST

EXAMPLE

OUT PUT TOTAL COST PRICE INDEX

10,000 30,0000 100

12, 0000 43,000 11O

15,000 41,000 120

Required: Calculate the total cost in period for when output is expected to be 18,000 units and price
index is k130

Example two
Months production units total cost (K”000)
1 7000 110
2 8000 115
3 7700 111
4 6000 97

Required: calculate the total cost to be expected in 5th month when output is expected to be 7500 units
using high low method

COST IN OUTLINE:

When organization is producing different goods or providing a service it incur cost. These cost in
organization are collected through the following.

1 RESPONSIBILITY CENTRE: A responsibility Centre is any department headed by someone. The person
who head a responsibility is in charge of a performance responsibility Centre.

COST UNIT: is a unit of a product or service to which cost are ascertained in other words it is a unit of a
product or service to direct cost are related e.g Guest per night, bed occupied per night

2, COST CENTRE; this is essentially a building block of costing system, they act as a collecting place for
certain cost before they analyzed further cost into cost unit e.g ward in hospital, department in
organization

3, REVENUE CENTRE; this may be a department, a section which is accountable for revenues only.
Revenue centre manager should normally have control over how revenue are raised an example of
revenue centre is a sale point.

3 PROFIT CENTRE: A profit Centre is accountable for both cost and revenue Centre. Profit Centre
manager should normally have control over how revenues is raised and how cost are incurred

4 INVESTMENT CENTRE: Investment Centre is a profit Centre with additional responsibility for capital
investment and possibly for financing and whose performance is measured by its return on
investment