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COSTASSIGNMENT
Conceptualcostclassification
AccordingtotheCharteredInstituteofManagementAccountants,costis“theamountof expenditure(actualornotional)incurredonorattributabletoaspecifiedthingoractivity.” Similarly,accordingtoAnthonyandWilsch“costisameasurementinmonetarytermsofthe amountofresourcesusedforsomepurposes.” CosthasbeendefinedbytheCommitteeonCostTerminologyoftheAmericanAccounting Associationas“theforegoing,inmonetaryterms,incurredorpotentiallytobeincurredinthe realisationoftheobjectiveofmanagementwhichmaybemanufacturingofaproductor renderingofaservice". From theabove,itmaybestatedthatcostmeansthetotalofallexpensesincurredfora productoraservice.Thus,costofanarticlemeanstheactualoutgoingsorascertained changesincurredinitsproductionandsaleactivities.Inshort,itistheamountofresources usedupinexchangeforsomegoodsorservices. Theso-calledresourcesareexpressedintermsofmoneyormonetaryunits.Whatwestated abovewillnotbeameaningfuloneuntilthesameisusedwithanadjectiveonly,i.e.whenit communicatesthemeaningforwhichitisintended. Thus,whenwesayPrimeCostorWorksCostorFixedCostetc.,wewanttoexplainaparticular meaningwhichisessentialwhilecomputing,measuringoranalysingthevariousaspectsof cost.
ClassificationofCost:
Classificationofcostsimpliestheprocessofgroupingcostsaccordingtotheircommon characteristics.Aproperclassificationofcostsisabsolutelynecessarytomentionthecosts withcostcentres.Usually,costsareclassifiedaccordingtotheirnature,viz.,material,labour, over-head,amongothers.Anidenticalcostfiguremaybeclassifiedinvariouswaysaccording totheneedsofthefirms. Theaboveclassificationmaybeoutlinedas:
VariableCosts,ontheotherhand,arethosewhichvaryproportionatelywiththevolumeof output.Sothecostperunitwillremainfixedirrespectiveofthequantityproduced.Thatis,there isnodirecteffectonthecostperunitifthereisachangeinthevolumeofoutput(e.g.priceof rawmaterial,labouretc.,). Onthecontrary,semi-variablecostsarethosewhicharepartlyfixedandpartlyvariable(e.g. Repairsofbuilding). (d)AccordingtoControllability: Costsmay,again,besubdividedintotwobroadcategoriesaccordingtotheperformancedone byanymemberofthefirm. Theyare: (i)ControllableCosts;and (ii)UncontrollableCosts. ControllableCostsarethosecostswhichmaybeinfluencedbythedecisiontakenbyaspecified memberoftheadministrationofthefirm or,itmaybestated,thatthecostswhichatleastpartly dependonthemanagementandiscontrollablebythem,e.g.alldirectcosts,directmaterial, directlabourandchargeableexpenses(componentsofPrimeCost)arecontrollablebylower managementlevelandisdoneaccordingly. UncontrollableCostsarethosewhicharenotinfluencedbytheactionstakenbyanyspecific memberofthemanagement.Forexample,fixedcosts,viz.,rentofbuilding,paymentfor salariesetc. (e)AccordingtoNormality: Underthiscondition,costsareclassifiedaccordingtothenormalneedsforagivenlevelof outputforanormallevelofactivityproducedforsuchoutput. Theyaredividedinto: (i)NormalCosts;and (ii)AbnormalCosts.
NormalCostsarethosecostswhicharenormallyrequiredforanormalproductionatagiven levelofoutputandwhichisapartofproduction. AbnormalCosts,ontheotherhand,arethosecostswhicharenotnormallyrequiredforagiven levelofoutputtobeproducednormally,orwhichisnotapartofcostofproduction. (f)AccordingtoTime: Costsmayalsobeclassifiedaccordingtothetimeelementinit.Accordingly,costsare classifiedinto: (i)HistoricalCosts;and (ii)PredeterminedCosts. HistoricalCostsarethosecostswhicharetakenintoconsiderationaftertheyhavebeen incurred.Thisispossibleparticularlywhentheproductionofaparticularunitofoutputhas alreadybeenmade.Theyhaveonlyhistoricalvalueandcannotassistincontrollingcosts. PredeterminedCosts,ontheotherhand,aretheestimatedcosts.Suchcostsarecomputedin advancedonthebasisofpastexperienceandrecords.Needlesstosayherethatitbecomes standardcostifitisdeterminedonscientificbasis.Whensuchstandardcostsarecompared withtheactualcosts,thereasonsofvariancewillcomeoutwhichwillhelpthemanagementto takeproperstepsforreconciliation. (g)AccordingtoTraceability: Costscanbeidentifiedwithaparticularproduct,process,departmentetc.Theyaredividedinto: (i)Direct(Traceable)Costs;and (ii)Indirect(Non-Traceable)Costs. Direct/TraceableCostsarethosecostswhichcandirectlybetracedorallocatedtoaproduct, i.e.itincludesalltraceablecosts,viz.,allexpensesrelatingtocostofrawmaterials,labourand otherserviceutilisedwhichcanbetracedeasily. Indirect/Non-TraceableCostsarethosecostswhichcannotdirectlybetracedorallocatedtoa product,i.e.itincludesallnon-traceablecosts,e.g.salaryofstore-keepers,general administrativeexpenses,i.e.whichcannotproperlybeallocateddirectlytoaproduct. (h)AccordingtoPlanningandControl: Costsmayalsobeclassifiedinto:
ofmarginalunitandthecostisknownasmarginalcostorincrementalcost. (b)DifferentialCost: DifferentialCostisthatportionofthecostofafunctionattributabletoandidentifiablewithan addedfeature,i.e.thechangeincostsasaresultofchangeinthelevelofactivityormethodof production. (c)OpportunityCost: Itistheprospectivechangeincostfollowingtheadoptionofanalternativemachine,process, rawmaterials,specificationoroperation.Inotherwords,itisthemaximum possiblealternative earningswhichmighthavebeenearnediftheexistingcapacityhadbeenchangedtosome otheralternativeway. (d)ReplacementCost: Itisthecost,atcurrentprices,inaparticularlocalityormarketarea,ofreplacinganitem of propertyoragroupofassets. (e)ImpliedCost: Itisthecostusedtoindicatethepresenceofarbitraryorsubjectiveelementsofproductcost havingmorethanusualsignificance.Itisalsocallednotionalcost,e.g.,interestoncapital —althoughnointerestispaid.Thisisparticularlyusefulwhiledecisionsaretakenregarding alternativecapitalinvestmentprojects. (f)SunkCost: Itisthepastcostarisingoutofadecisionwhichcannotberevisednow,andassociatedwith specialisedequipment’sorotherfacilitiesnotreadilyadaptabletopresentorfuturepurposes. Suchcostisoftenregardedasconstitutingaminorfactorindecisionsaffectingthefuture.
