Costing: - Chapter 01 - Cma Intermediate - Macampus

Costing – Chapter 01 – CMA intermediate – MaCampus
1.3 CLASSIFICATION OF COST
Classification of cost is the arrangement of items of costs in logical groups having regard to their nature or
purpose.
As per Cost Accounting Standard 1 (CAS-1), the basis for cost classification is as follows:
(a) Nature of expense
(b) Relation to Object – Traceability
(c) Functions / Activities
(d) Behaviour – Fixed, Semi-variable or Variable
(e) Management decision making
(f) Production or Process
(g) Time Period
(a) Nature/Element of Cost:
(b) Relation to Object – Traceability
Indirect Material: For example, glue, oil, tape, cleaning supplies, etc
Indirect Labour: An example would be security guards, supervisors, and quality assurance workers in the
factory.
Indirect Expenses: Accounting, audit, and legal fees.
(c) Functions / Activities
Pre-Production Costs: Preproduction costs are normally treated as deferred revenue

expenditure and charged to the costs of future production.
(d) Behaviour – Fixed, Semi-variable or Variable
(e) Management decision making

Ascertainment of cost is essential for making managerial decisions. On this basis costing may be
classified into the following types.
Marginal Costing: is the accounting system in which variable costs are charged to cost units and
fixed costs of the period are written off in full against the aggregate contribution. Note that variable costs are
those which change as output changes - these are treated under marginal costing as costs of the product.
Differential Cost: Differential cost is the change in the cost due to change in activity from one level to
another.
Opportunity Cost: Opportunity cost is the value of alternatives foregone by adopting a particular strategy or
employing resources in specific manner
Replacement Cost: Replacement cost is the cost of an asset in the current market for the purpose of
replacement.
Relevant Costs: Relevant costs are costs which are relevant for a specific purpose or situation.
Imputed Costs: Imputed costs are hypothetical or notional costs, not involving cash outlay computed only
for the purpose of decision making. In this respect, imputed costs are similar to opportunity costs. – Ex. Rent
for Own Building
Sunk Costs: Sunk costs are historical costs which are incurred i.e. sunk in the past and are not relevant to the
particular decision making problem being considered.
Normal Cost & Abnormal Cost: Normal Cost is a cost that is normally incurred at a given level of output in
the conditions in which that level of output is achieved. Abnormal Cost is an unusual and typical cost whose
occurrence is usually irregular and unexpected and due to some abnormal situation of the production.
Avoidable Costs & Unavoidable Costs: Avoidable Costs are those which under given conditions of
performance efficiency should not have been incurred. Unavoidable Costs which are inescapable costs, which
are essentially to be incurred, within the limits or norms provided for.
Uniform costing can be defined as the 'use by several undertakings of the same costing principle and
practices'. In other words, it is a technique or method of costing by which different firms of a field or industry
apply similar costing system so as to produce cost data which have maximum comparability.
For example, we talk about electrical industry. Bajaj International Private Ltd, Bharat Heavy Electricals
Limited (BHEL), Centre for Electronics Design and Technology and Crompton Greaves Limited (CGL)are
the main electrical companies. If these companies join and make a costing system in which they will use
same costing methods and techniques, then it will be said that these are following uniform costing. With this,
these companies reduce unhealthy competition.
Engineered Cost: Engineered Cost relates to an item where the input has an explicit physical relationship
with the output.
Marketing, air conditioning, and Mr.X's(not related to production) salary are not considered engineered costs
because they do not have a direct cost relationship to outputs. Direct labor and direct materials can be directly
linked to output, and are therefore considered engineered costs.
Out-of-Pocket Costs: are very much relevant in the consideration of price fixation during trade recession or
when a make-or-buy decision is to be made. It is opposite of imputed cost
Managed Cost: relate to such items where no accurate relationship between the amount spent on input and
the output can be established and sometimes it is difficult to measure the output. Examples are advertisement
cost, research and development costs, etc.,
Common Costs: These are costs which are incurred collectively for a number of cost centres and are
required to be suitably apportioned for determining the cost of individual cost centres. Examples are:
Combined purchase cost of several materials in one consignment
Controllable and Non-Controllable Costs: Controllable Cost is that cost which is subject to direct control
at some level of managerial supervision. Non-controllable Cost is the cost which is not subject to control at
any level of managerial supervision.
(f) Classification by nature of Production or Process:
Batch Costing: Batch Costing is the aggregate cost related to a cost unit which consists of a group of similar
articles which maintains its identity throughout one or more stages of production. In this method, the cost of
a group of products is ascertained.
Ex: readymade garments, drugs and pharmaceuticals, spare parts and component parts as in the case of
automobiles, radios, TV's, refrigerators, machineries, etc.
Process Costing: When the production process is such that goods are produced from a sequence of
continuous or repetitive operations or processes, the cost incurred during a period is considered as Process
Cost.
Ex: Chemical industries, refineries, gas and electricity generating concerns may be quoted as examples of
undertakings that employ process costing.
Operation Costing: It is the cost of a specific operation involved in a production process or business activity.
A mix of job costing and process costing is used to compile the cost of a product; this mixed costing
environment is called operation costing. When the manufacturing method consists of a number of distinct
operations, operation costing is suitable.
Operating Cost: Operating cost is the cost incurred in conducting a business activity. Operating cost refer
to the cost of undertakings which do not manufacture any product but which provide services. Industries and
establishments like power house, transport and travel agencies, hospitals, and schools.
Contract Costing: Contract cost is the cost of contract with some terms and conditions between contractee
and contractor. This method is used in undertakings, carrying out, building or constructional contracts like
constructional engineering concerns, civil engineering contractors.
Joint Costs: Joint costs are the common cost of facilities or services employed in the output of two or more
simultaneously produced or otherwise closely related operations, commodities or services.
For example, in petroleum industry petrol, diesel, kerosene, naphtha, tar is produced jointly in the refinery
process.
(g) Classification by Time
Historical Costs: Historical Costs are the actual costs of acquiring assets or producing goods or services.
They are post-mortem costs ascertained after they have been incurred and they represent the cost of actual
operational performance.
Predetermined Costs: Pre-determined Costs for a product are computed in advance of production process,
on the basis of a specification of all the factors affecting cost and cost data. Predetermined Costs may be
either standard or estimated.
Standard Costs: The Standard Cost serves as a basis of cost control and as a measure of productive efficiency,
when ultimately posed with an actual cost.
Estimated Costs: Estimated Costs of a product are prepared in advance prior to the performance of operations
or even before the acceptance of sale orders.
Techniques of Costing
A. Marginal Costing – Mentioned above

B. Standard Costing – Mentioned above
C. Budgetary Control - Budgetary Control may be defined as the process of continuous comparison
of actual costs and performance with the pre-established budgets in relation to the responsibilities
of the executives to the specific budgets for the achievement of a target in accordance with the policy
of the organisation and to provide a basis for revision of budget.
D. Uniform Costing - Uniform Costing may be defined as the application and use of the same
costing principles and procedures by different Organizations under the same management or on a
common understanding between members of an association
1.4 ROLE OF COST ACCOUNTANTS IN ORGANISATIONS
The cost accountants perform one of the most important roles in the entire organisations. They deal
with the preparation of various reports for the knowledge and decision making by the senior
management.
GLOSSARY
Activity based Costing (ABC): Activity based Costing is a system that focuses on activities as
the fundamental cost objects and uses the cost of these activities for compiling the costs of products
and other cost objects.

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Costing – Chapter 01 – CMA intermediate – MaCampus

1.3 CLASSIFICATION OF COST

(a) Nature/Element of Cost:

(b) Relation to Object – Traceability

Pre-Production Costs: Preproduction costs are normally treated as deferred revenue

(d) Behaviour – Fixed, Semi-variable or Variable

(e) Management decision making

A. Marginal Costing – Mentioned above

1.4 ROLE OF COST ACCOUNTANTS IN ORGANISATIONS

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