Question

In your own words describe in detail the types of cost classifications and how they relate to business as well as giving examples of those costs. Additionally discuss the overlap, i.e. how costs can be classified as more than one type of cost classification.

Answer 1

COST CLASSIFICATION
BASED ON BEHAVIOUR	VARIABLE COST
	FIXED COST
	SEMI VARIABLE COST
BASED ON OPERATION	DIRECT COST
	IN DIRECT COST
BASED ON CASH OUTLFOWS	OUT OF POCKET COST
	NOTIONAL COST
BASED ON RELAVANCE TO DECISION MAKING	RELAVANT COST
	IRRELEVANT COST

FOLLOWING ARE THE DIFFERENT TYPES OF COST:

- DIRECT COSTS:

THESE COST ARE DIRECTLY RELATED TO THE OPERATION OF THE BUSINESS WHICH MAY BE PRODUCTION , SALE OR SUPPLY OF GOODS OR SERVICES.

FOR EXAMPLE, COST OF MATERIAL, COST OF LABOR OR DIRECT EXPENSES, VARIABLE OVERHEADS.

THESE COST INCREASE OR DECREASE GENERALLY IN THE SAME PROPORTION TO THE NO. OF UNITS PRODUCED OR SOLD OR SERVICES PERFORMED

- INDIRECT COST

THESE COST ARE INCURRED TO FACILITATE THE ACTIVITY OF PRODUCTION, SALE OR SUPPLY OF SERVICES. THESE COST ARE NOT DIRECTLY RELATED TO THE ACTIVITY OF PRODUCTION.

EXAMPLES ARE: ELECTRICITY, STAFF SALARY OR RENT PAID FOR THE WHOLE PREMISES.

THESE ARE NOT DIRECTLY TRACEABLE TO ANY PRODCUT OR SERVICES.

THESE SHALL BE ALLOTED TO SERVICES OR PRODUCTS BASED ON ANY REASONABLE RATIOS.

- FIXED COST

THESE COST ARE RELATIVELY FIXED IN NATURE FOR A PARTICULAR PRODUCTION CAPACITY. THEY CHANGE WITH THE INCREASE IN PERIOD. THEY DO NOT VARY DIRECTLY WITH THE NO. OF SERVICES PERFORMED OR GOODS PRODUCED OR SOLD.

FOR EXAMPLE , RENT OF THE BUILDING, DEPRECIATION,

- VARIABLE COST:

THESE COST DIRECTLY CHANGE WITH THE NO. OF SERVICES PERFORMED OR GOODS PRODUCED.

FOR EXAMPLE, DIRECT MATERIAL COST, PACKAGING COST, DIRECT LABOR COST, SALES COMMISSION PAID

- OPERATING COST:

THESE ARE COSTS INCURREED FOR DAY TO DAY BUSINESS ACTIVITY. THESE IS INCURRED FOR ALL GENERAL FUNCTIONS FOR ALL PRODUCT OR SERVICES.IT CAN NOT BE CHARGED TO ANY ONE PRODUCT.

- OPPORTUNITY COST:

THESE IS A NOTIONAL COST. THESE IS NOT THE CASH EXPENSE. IT IS THE COST OF SACRIFYING EXPECTED BENEFIT FROM NEXT BEST ALTERNATIVE FOR CHOOSING THE FIRST ONE.

IT IS RELATED TO MUTUALLY EXCLUSIVE OPPORTUNITY EXIST.

- SUNK COST:

THESE ARE HISTORICAL COST WHICH IS ALREADY INCURRED AND CASH OUTFLOW INCURRED. FOR DECISION MAKING IN CURRENT PERIOD, IT BECOMES IRRELEVANT.

- OUT OF POCKET COST:

THESE ARE EXPENSES WHICH ARE PAID IN CASH. IT MAY BE RELATED TO PRODUCTION, ADMINISTRATION, SALES AND DISTRIBUTIONS ETC.

- NOTIONAL COST:

THESE COST ARE NOT PAID IN CASH. EXAMPLES ARE DEPRECIATION, OPPORTUNITY COST.

- RELAVANT COST:

THESE COST ARE GOING TO CHANGE WITH ANY PARTICULAR DECISION THEREFORE IT BECOMES RELEVANT COST FOR THAT DECISION MAKING. THEY MAY INCREASE OR DECREASE WITH THE PARTICUALR DECISION. EXAMPLE : DECISION OF WHETHER TO PURCHASE FROM OUTSIDE OR TO PRODUCE INHOUSE. HERE THE COST LIKE, VARIABLE OVERHEADS FOR MANUFACTURING AND TRANSPORTATION BECOMES THE RELEVANT COST.

- IRRELEVANT COST:

COST WHICH WILL NOT CHANGE WITH PARTICULAR DECISION BECOMES IRRELEVANT COST. FOR EXAMPLE: COST OF FACTORY RENT NOT CHANGE WITH DECISION OF WHICH PRODUCT SHALL BE PRODUCED FIRST.

COST WHICH CAN BE CLASSFIFIED IN DIFFERENT HEADS
DIRECT MATERIAL, DIRECT LABOR , DIRECT OVERHEADS	DIRECT COST	VARIABLE COST	RELEVANT COST	OUT OF POCKET COST
MANUFACTURING OVERHEADS LIKE RENT, SALARY, SECURITY	INDIRECT COST	FIXED COST	RELEVANT COST	OUT OF POCKET COST
SELLING AND DISTRIBUTION OVERHEADS	INDIRECT COST	VARIABLE COST	RELEVANT	OUT OF POCKET COST
		SEMI VARIABLE COST	IRRELEVANT
		FIXED COST
DEPRECIATION OR AMORTISATION	INDIRECT COST	FIXED COST	IRRELEVANT	NOTIONAL COST
COST OF PURCHASING MACHINE	INDIRECT COST	FIXED COST	IRRELEVANT	SUNK COST
ADMINISTRATIVE COST	INDIRECT COST	VARIABLE COST	RELEVANT	OUT OF POCKET COST
		SEMI VARIABLE COST	IRRELEVANT
		FIXED COST