COST

Meaning of Cost
• In economics point of view- Cost means price.
• In accounting point view- it is the value of a
product expressed in monetary term.
 Classification of Cost
• Cost are classified according to different bases of classes,
such as
• By Element
• By Nature
• By Variability
• By Controllability
• By Function
• By Normality
• By Time
• By Relevance to decision making and control
 By Element
• In this class, costs are categorized based on the factors they are
incurred for. Based on their elements, costs may be grouped as:
• Material cost-Material cost refers to the cost of commodities
supplied to an undertaking (e.g., in the case of a textile mill, the
cost of cotton or yarn, the cost of cotton waste to clean the
machinery, the cost of dyes, the cost of finishing material, and so
on).
• Labor cost- Labor cost refers to the cost of paying employees in an
undertaking, which includes salary, wages, and commission.
• Expenses- It refers to the cost of services provided to an
undertaking and include the notional cost of owned assets (e.g.,
rent for a building, telephone expenses, depreciation of the owned
factory building, depreciation of delivery van, and so on).
 By Nature
• In this class, costs are classified based on their identifiability with cost
centers or cost units. Costs can be grouped as follows based on their nature:
• Direct costs
• Indirect costs
• Direct costs are costs that can be directly and easily traced to (or identified
with) a product, process, or department. Common examples of direct costs
include the materials used and labor employed in manufacturing an article
or in a production process.
• Indirect costs, on the other hand, are costs that are not traceable to any
particular product, process, or department, but which are common in a
number of products, processes, or departments.
• Examples of indirect costs are factory rent, factory insurance, and the salary
of the factory manager.
 By Variability
• Costs (both direct and indirect) can also be classified into the following groups based on their
behavior relative to changes in the volume of activity:
• Variable costs
• Fixed costs
• Semi-variable or semi-fixed costs
• Variable costs are costs that vary in a directly proportional way to changes in the volume of
output or sales. These costs tend to increase or decrease with the rise and fall in production or
sales. Variable costs vary in total but their per-unit cost stays the same. 
• Examples of variable costs are direct material cost, direct wages, direct expenses, consumable
stores, and commission on sales.
• Fixed costs are costs that generally remain unaffected by changes in sales volume/output. Fixed
costs remain unchanged when output or sales increase or decrease. These costs remain fixed in
total but their per-unit cost changes with output or sales.
• Semi-variable costs are costs that tend to vary with changes in the volume of output or sales,
but which do not vary in a directly proportional way relative to such changes. These costs have
the characteristics of both fixed and variable costs. 
• Typical examples of semi-variable costs include repairs and maintenance costs for plants,
machinery, and buildings and supervisor salaries.
 By Controllability
• Under this category, costs are classified based on
whether or not they are influenced by the action of a
given member of an undertaking. The classes of costs
are:
• Controllable costs are costs that an entity in an
undertaking can influence through their action
• Uncontrollable costs are costs that cannot be
influenced by the action of a specified member of an
undertaking. Costs that are controllable for one
person may be uncontrollable for another person. 
 By Normality
• In this category, costs are classified based on
whether they are normally incurred at a
particular level of output under the conditions
for which that level of output is normally
attained. Based on normality, costs may be
classified as:
• Normal or unavoidable costs
• Abnormal or avoidable costs
 By Function
• Costs can also be classified based on their perceived
function. The following types of cost exist by function:
• Production costs- It refers to costs that arise in the course
of acquiring, processing, and using raw materials.
Production costs include the cost of materials, cost of labor,
other factory expenses, and the cost of primary packing.
• Administration costs are the costs incurred in formulating
business policies, directing the organization, and
controlling the operations of an undertaking.
Administration costs are not related to research,
development, production, distribution, or selling activities.
• Selling costs are incurred to create and
stimulate demand and secure orders. As such, these
costs are incurred in connection with the marketing
of products.
• Distribution costs are associated with the sequence
of operations. This sequence starts with dispatch
preparations for the packed product and ends by
facilitating the availability of the reconditioned,
returned, and empty packages for re-use.
 By Time
• From the view of time, costs can be classified as:
• Historical costs are costs that are identified after
they have been incurred. That is to say, they are
determined after goods have been manufactured
or services have been rendered. 
• Predetermined costs are computed in advance of
production based on a specification of all the
factors affecting them. 
 By Decision making and Control
• In this category, costs are classified based on whether they
are relevant to managerial decisions. These costs are as
follows:
• Marginal Cost: Marginal cost is defined as “the amount at
any given volume of output by which aggregate costs are
changed if the volume of output is increased or decreased
by one unit.” 
• Sunk Costs: Sunk costs refer to costs that have already
been incurred and cannot be changed by a future decision.
These costs become irrelevant costs for later decisions. 
• Out-of-pocket Costs: These costs represent the present or
future case expenditure regarding decisions, which vary based
on the nature of the decision. Management decisions are
directly affected by such costs because they give rise to cash
expenditure. 
• Opportunity Costs: The opportunity cost of a product or service
is measured in terms of revenue that could have been earned by
applying the resources to some other use. Opportunity cost can
be defined as the cost of foregoing the best alternative. 
• Imputed Costs: Imputed costs are costs that are not included in
costs but are considered for making management decisions.
These costs are hypothetical in character. 
• Differential Costs: Differential costs refer to the
difference in total costs between two alternatives.
When choosing an alternative increases total costs,
such increased costs are known as incremental costs.
• Shut-down Costs: Shut-down costs are costs that will
still be incurred when a plant is shut down
temporarily. Sometimes, the normal operations of
a business must be suspended temporarily due to
unfavorable market conditions, strikes, or other
forces. 
• Postponable Costs: These are the costs that
can be postponed or shifted to the future with
little or no effect on the efficiency of current
operations. These costs are postponable but
not avoidable and must be incurred at a later
stage. 
• Replacement Cost: Replacement cost is the
cost of replacing an asset in the current market
or at the current price.