5.2 Items should be classified by one characteristic for a … endobj Cost Classification by Time 4. manufacturing, administration, selling and distribution groups.

These costs per unit remain relatively constant with changes in production. The corresponding fixed overheads may or may not be recovered if it is not practical to do so. By solving the equation, the values of m and c are obtained which help in determining the relationship between fixed and variable costs. After all the concept of fixed or variable expenditure is in relation to a particular rate of output. This is a statistical method and is based on finding out a line of best fit for a number of observations. Classification based on traceability is important for accurate costing of jobs and units produced. Do they increase as an organisation gets busier or do they tend to stay the same? They simply tend to vary rather than vary directly in direct proportion to output. Basic Rules for Classification of Costs 5.1 Classification of cost is the arrangement of items of costs in logical groups having regard to their nature (subjective classification) or purpose (objective classification). Such fixed overheads may be recovered from sales in more favourable markets. The definition that fixed overheads remain constant in spite of increase or decrease in the level of activity will hold true only in short period during which no appreciable change in capacity occurs. Cost Classification refers to a complete and transparent idea of separation of expenses in the different sector as like manufacturing cost, product cost, sunk cost, variable cost, direct cost, and indirect cost etc. But there are many other factors which influence costs as production specification, product mix, method of production, technology, plant and equipment, productivity, organisation structure, management policies and price indices etc. Analysis of cost behaviour is significant to all organizations for effective management. Points falling far behind the line are erratic and are not considered for this purpose. This classification is necessary for the segregation of the cost of each of the principal functional division of the concern and for having separate methods of accounting and control for the diverse nature of expenses in each division. Fixed expenses are incurred by management decisions and as such can be controlled by the top management while the variable expenses can be controlled by the lower levels of management. Fixed overhead expenses are thus period costs representing a constant amount of expenditure during a particular period. In all the above methods discussed it is assumed that prices are at a constant level and movements in costs have been caused by changes in volume only. It is not only helpful for cost finding but also for cost control and managerial decision-making.
indirect material, indirect labour and indirect expenses and under each element, the expenses may be further subdivided according to their nature i.e. Sometimes, they are also termed as shutdown or stand-by costs. Labour: Labour cost is the salary and wages paid to the employees, i.e. Variable cost at any level may be obtained by measuring the difference between fixed cost line and total Cost line.

Between these plotted points, a line of best fit is drawn in such a manner that equal number of points lie on both sides of the line at more or less equal distance. high or low points is compared with the amount of expenses incurred at these different periods. an expenditure which varies directly with variation in the volume of output. Direct Costs: So these are the costs which are easily identified with a specific cost unit or cost centers. However, it is desirable to have most effective utilisation of plant capacity in order to reduce the fixed cost per unit to the minimum. Classification of costs based on behavior helps in cost-volume-profit analysis. the cost of operating supplies and services used by the undertaking including the maintenance of capital assets. The degree of variability differs with reference to each item of semi-variable expense. (ii) Increase in efficiency and productivity of labour; (iii) Less human efforts will be required because of automatic machines but more machine expenses will have to be incurred; (iv) More depreciation, maintenance expenditure and similar other items because of more use of machinery; (v) Improved methods of managerial control like work study, production control, cost and management accountancy techniques may reduce the direct cost but will increase the overhead costs.

Similarly, in times of trade depression, it will be profitable for a manufacturer to sell his goods below the total cost, provided the selling price is in excess of variable cost. 508 In short, classification of overhead into fixed and variable is highly helpful to the management for the efficient running of the factory. Different methods may be adopted for determination of absorption rates for fixed and variable overheads. Broadly speaking, any expenditure over and above prime cost is known as overhead. The method to be adopted for the classification of overhead costs depends upon the type and size of the business, nature of the product or services rendered and policy of the management.


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