Rayat Shikshan Sansthas S M JOSHI COLLEGE HADAPSAR

Rayat Shikshan Sanstha’s S. M. JOSHI COLLEGE, HADAPSAR, PUNE - 411028 Department of Commerce Prof. Gulave R. G.

CLASSIFICATION OF COST Ø Ø Ø Elements Behavior Functions Normality Control Decision Making

Elements • MATERIAL • LABOUR • EXPENSES

MATERIAL • Direct: traceable to one particular process, job or product – identified with each unit of product • Example: manufacturing an apparel • Cloth, collar, buttons, cufflinks, thread Primary packing material (e. g. , carton, wrapping, cardboard, boxes, etc. ) • Fuel, lubricating oil etc for operating & maintenance of machine • Small tools • Materials used for repairs & maintenance

LABOUR • • Inspectors Supervisors Internal transport staff Storekeeper, maintenance staff

EXPENSES • • Expenses leading to a job or contract Traveling expenses for negotiation Special pattern, design Special tools for executing the contract • Rent • Insurance • Canteen, hospital, power , lighting, maintenance

Behavior Fixed in short run & long run Variable Varies with volume and constant per unit Semi-variable A cost could be variable for one level of activity whereas it could be fixed for another. Not inherently fixed or variable Many costs are semi-variable in nature

Functions • • Production Cost Administration Cost Selling Cost Distribution Cost

Normality • Normal • Abnormal

Controllable & Uncontrollable

Planning & Control • Budgeted Cost: estimate of expenditure for different business operations • Standard Cost: for prescribed set of operating conditions, labour, material and overheads are predetermined; budget translated into actual operation through standard costs

Decision Making • Marginal vs. Absorption Costing (with fixed cost and without FC) • Sunk - irrelevant • Committed – pre committed • Opportunity • Incremental / Differential • Avoidable & Unavoidable • controllable / uncontrollable

Relevance • Relevant • Irrelevant

Cont…. . • Irrelevant cost: not relevant for decision making • Example: Sunk costs: Sunk cost is the cost of abandoned plant less salvage value. Not relevant for decision making. • Imputed (Notional cost): Actually not incurred (interest on own capital, rent on owned building, etc. ) Taken into account in capital budgeting decisions. • Replacement cost: Cost of replacing at current market price.

Cont…. . • Avoidable and unavoidable cost: Cost that can be avoided by eliminating a product or department is avoidable and that which cannot be, is unavoidable. Ex. – Rent of factory is unavoidable if a product is discontinued.

Other costs: • Future costs: cost to be incurred in future • Programmed cost: Cost incurred as per policy of top management. Ex. - Donation to charity. • Joint cost: cost of joint or by-products incurred before separation, which cannot be traced to particular products. • Conversion cost: cost of converting raw material to finished goods = Production cost- direct material. • Discretionary cost: not essential for decision on hand. Ex. Training expenses of workers, R&D cost. • Committed cost: Costs incurred due to past decisions and are not within control in the short run at present. Ex. - Depreciation on Plant, Rent, etc.