Cost Classification

Cost Classification

1. Historical & Future Costs  Historical cost may be an expired cost or an unexpired cost.  Expired cost is the monetary value of the resources that have already been used in producing revenue.  Unexpired cost is the one which still has a potential of generating revenue in future. An unexpired cost is an asset.

 Future costs are based on forecasts & can be planned  Future costs help to plan ahead & control activities  Historical costs are used as starting point to predict future costs  Future/predicted costs are called budgeted or standard costs.

2. Direct & Indirect Costs  Direct costs are those cost items which can be traced logically & conveniently, in their entirety , to a cost object.  Indirect costs are those cost items which cannot be traced or identified directly with a cost object.  It is not easy to determine the amount of indirect costs assignable to each cost object.  Since indirect costs are common to two or more cost objects, they are called common costs

2. Fixed & Variable Costs  When total cost remains non-variable to changes in volume, it is called a fixed cost.  This cost will remain constant whether production is zero or 1,00,000 units.  The total fixed cost remains constant but the fixed cost per unit varies with volume.

2. Fixed & Variable Costs  When total cost changes in direct proportion to changes in volume, it is called variable cost.  The variable cost per unit remains uniform, the total variable cost fluctuates proportionately to the volume.

3. Budgeted & Standard Costs  A standard cost is predetermined cost based on past experience & data  Standard costs constitute an important managerial tool of controlling costs & evaluating performance.

Budgeted costs  Budgeted costs are those costs which are expected to be incurred for the planned activities of an enterprise for a specified period of time.  Budgeted costs are expressed as total while standard costs are expressed on per unit basis.  Those costs for which unit standards cannot be set are predetermined by preparing a budget. Eg: fixed factory overhead

4. Controllable & Non-Controllable

costs  Controllable costs are those which can be influenced to a significant extent by the actions of an individual at a specific responsibility level within a specific time span.  Those costs which are not subject to the direct authority & actions of an individual are Non-controllable at his responsibility level.

5. Relevant & Irrelevant costs  Cost which is influenced by a decision is a relevant cost & is important for decisionmakers.  If a company wants to make a component, the relevant costs are- material & labour cost, fixed costs to be incurred for creating additional manufacturing facilities.

5. Relevant & Irrelevant costs  Cost which is not affected by a decision is irrelevant cost.  Normally, all fixed costs are irrelevant costs.

5. Out-of-pocket costs & sunk

costs

 Current/future cash expenditure required as a result of a decision is an out-of-pocket cost.  Those costs which have been incurred in the past & will not require current cash expenditure are sunk costs. Eg: depreciation, preliminary expenses.