Question

Discuss cost classification based on variability and controllability..

Answer 1

On the basis of variability , cost is classified into three types-

1. FIXED COST- Fixed costs are the costs that don't chnage with the level of production, upto a certain level of capacity . Even at zero level of production, these costs remain the same. Fixed costs can never be zero. Per unit fixed costs change with the level of production . It has an inverse relation with the level of production .Example- rent of factory, insurance, salaries etc  

2. VARIABLE COST- Variable costs are the costs that chnage proportionately with the change in out. The variable cost per unit is usually constant, unless change in conditions are there.At zero level of production , variable costs are zero. Variable costs arise only when there is production activity.It is also called marginal cost or direct cost. Example- direct materials, direct labour etc.

3 SEMI VARIABLE COST- Semi variable costs have the characteristics of both fixed cost and variable cost. These costs vary with the level of production but not in direct proportion to the level of production. These costs remain fixed but varies when production goes beyond a certain level. It does not change with every increase or decrease in production. These costs are also not usually zero. Exmaples- depreciation, maintenance of equipment, electricity, administrative expense etc

On the basis of contollability, costs can be classified into 2 types

1. CONTROLLABLE COSTS- These are the costs which can be influenced by the decisions of management. Costs are at least partly within the control of the management. The direct costs such as material cost, direct labour costs are somewhat in control of the management. They can reduce or increase the cost based on the sources from where these resources are obtained and how they utilize these resources.

2. UNCONTOLLABLE COSTS- These are the costs which cannot be influenced by the managemnt . These costs cannot be controlled by any action taken by the management. Most fixed costs are uncontrollable costs, such as rent of the factory.