 Classification of Costs

1. By Nature or Elements.
 Direct Material Costs.
 Direct Labour Costs.
 Factory Over Head Costs. i.e. Factory
supplies ,Lubricants, supervision,
inspection, defective work, Rent,
insurance, depreciation, Maintenance
and Repair, Power , Light and Head,
 Prime Cost = Direct Labour + Direct
Material
 Conversion Cost = Direct Labour+ FOH
 Flat Cost or Total Factory Cost.=
DM+DL+FOH

MBA(UOS) Lecture 2
  Classification of Costs
2. By Functions:
 Production, Administration, Selling &
Distribution
 Production costs. Materials,
Labour, Factory over head.
 Administration Expenses: admin *
office Salary, payroll taxes, rent,
depreciation, property tax,
auditing expenses, Legal
expenses, Postage etc.
 Selling & Distribution expenses:
Sales Salaries, sales Commission,
advertising, Samples, carriage out
etc.

MBA(UOS) Lecture 2
  Classification of Costs
3. Direct & Indirect Costs.
 Direct Cost are those which can easily and conveniently be
identified in a unit of cost. Direct Material, Labour & FOH.

 Indirect costs are those which can not be easily traced in

the unit of cost. Depreciation, Rent etc.

4. According to Variability.
 Fixed Costs
 In Total Remains Fixed.
 Per Unit decrease with increase in production.
 Control rests with top management.
 Assigned by managerial decision.

MBA(UOS) Lecture 2
  Classification of Costs
 Variable Costs
 In Total Increase with production level.
 Per Unit remains constant.
 Control rests with departmental head.
 Can be easily and accurately assigned by
departmental head.
 Semi Variable Costs
 A Combination of both fixed & Variable.
 Not zero even the production is zero.
 Increases with increase in production.

MBA(UOS) Lecture 2
  Classification of Costs
5. According to Controllability.
 Controllable Costs: Which are some how
controllable by management.
 Un Controllable Costs: Which are beyond the
control of management.

6. Capital or Revenue Costs.

 Capital costs are those which are for purchase of
fixed assets.
 Revenue costs are those which are for purchase
of current assets.

MBA(UOS) Lecture 2
  Classification of Costs
7. Normality.
 Normal costs are those which incurred at a
given level of out put.
 Abnormal Costs are those which do not incurred
at a given level of out put.

8. Classification by time.
 Historical Cost : The costs which are
ascertained after being incurrence.
 Predetermined costs. Estimated in advance.

MBA(UOS) Lecture 2
  Classification of Costs
9. Product & Period Costs.
 Product Costs are those which are directly related with
product.
 Period Costs are those which are not directly related
with product and are associated with time period.
10. Classification for managerial Decisions.
 Marginal Cost. Is the total of Direct Material, Direct
Labour and Variable Factory over Head.
 Differential Cost: Change in costs due to change in
level of output.
 Opportunity Cost. The cost of 2nd best alternative.
 Replacement Cost. Cost of replacement of an existing
asset or facility.

MBA(UOS) Lecture 2
  Classification of Costs
 Sunk Cost. Which have already been incurred
and are not relevant for decision making.
 Out of Pocket Costs: which involve payment of
cash on the other hand there are expenses like
depreciation etc.
 Imputed or notional Costs: which are used for
decision making only like rent of own building
and interest on capital.
 Avoidable & Un avoidable Costs. Avoidable cost
are those which can be avoid by eliminating a
department of facility.

MBA(UOS) Lecture 2