Cost Classification - Introduction to Cost Accounting, Cost Accounting Video Lecture | Cost Accounting - B Com

you
please like if you find this video
helpful caused classification as f to
students you are required to know the
different ways of classifying and
describing costs some terminology you
should know here are caused objects
caused units and cost centers caused
objects are any item or activity for
which costs are being separately
measured the most common cost objects
are a company's output its product or
service but it could also be a
department a product line or a process
etc a cost unit this is a unit of
product or service in relation to which
costs are ascertained it is the cost
incurred by a company to produce store
and sell one unit of a particular
product computed usually as the average
cost a cost unit includes all fixed and
all variable costs incurred in a unit of
product or service for example it costs
company a 10000 to produce 5000 widgets
companies A's cost per unit is 10000
divided by 5,000 so 2 per unit cost
centres are a part of an organization it
is a location person or item of
equipment for which cost can be
ascertained and used for the purpose of
cost control examples of call centers
include research and development
departments marketing departments help
desks customer service centers and so
forth cost can be classified by element
function nature controllability
responsibilities product or period and
behavior by element which is material
labor or expense costs material costs
are all costs of materials purchased
labor costs
are all staff costs relating to
employees on the payroll of an
organization expense costs are all other
costs incurred by the organization which
are not material or labor costs function
costing involves grouping costs based on
the different functions or activities of
the organization for example a business
may classify costs into production costs
or non production costs production costs
are those costs incurred when converting
raw materials into finished or part
finished goods non production costs are
all costs not related with the
production process production costs are
direct materials direct materials are
the materials which go into the making
of a product direct labor direct labor
are the costs of labor directly involved
in the making of the product direct
expenses are the cost of expenses
directly involved in the making of the
product variable production costs these
are the indirect costs that relate to
production they vary in direct
proportion to the quantities of
production and fixed production
overheads these are the indirect costs
that relate to production they are fixed
and do not vary in relation to the
quantities of production non production
costs are administration costs these are
the general costs of running the
business selling costs these are the
costs associated with marketing and
taking sales orders distribution costs
these are the costs of distributing the
finished products and finance costs
these are the costs incurred in order to
finance the organization
by nature direct and indirect costs
direct costs can be defined as costs
which can be completely attributed to a
cost object cost objects may be a
product cost unit a department or a
project cost Center examples of direct
costs direct materials for example
cloths for making curtains direct labor
for example the wages of the workers
stitching the cloth to make the curtains
direct expenses for example the freight
charges for importing specialized
materials for the curtains the total of
direct costs which is direct materials
plus direct labor plus direct expenses
is known as prime costs indirect costs
cannot be directly identified to a
specific cost object they are costs that
typically benefit multiple cost objects
and it will be impractical to accurately
attribute them to individual products
services or departments examples of
indirect costs include the following
indirect materials these include
materials that cannot be traced to an
individual curtain for example machine
oil used to lubricate the machines
indirect labor for example the cost of a
supervisor who supervises the curtain
makers indirect expenses for example the
cost of renting the factory the total of
indirect costs which is indirect
materials plus indirect labor plus
indirect expenses is known as overheads
by controllability all costs for a
company are controllable costs at some
level of management however some costs
are uncontrollable costs we regards to a
particular manager or department if a
manager or department has Authority and
responsibility for certain costs those
costs are called controllable costs the
non controllable costs are those costs
that a department or manager doesn't
have authority over and cannot change
the difference between controllable and
uncontrollable costs is of particular
significance to management because
managers want to be held responsible
only for those costs which are within
their control and not for the costs
which are beyond their control
responsibilities costing involves
grouping costs together according to
which individual manager or management
team are responsible for the control of
the cost a responsibility cost
accounting system divides an
organization into several part or
responsibility centers each
responsibility center has a manager
responsible for the operation and
performance of that center by product or
period cost this classification becomes
important when you study marginal and
absorption costing product costs are all
the costs involved in making or buying
an item of inventory these costs are
included in the inventory value and
therefore the cost of sales value at the
time of sale period costs are all costs
not included in product costs since
these costs are not involved in the
production process these costs are
included in the income statement for the
period in which they relate the
distinction between product and period
costs is necessary for calculating
inventory values and profit figures
behavior costing involves grouping costs
according to the way they behave cost
behavior is concerned with the impact a
change in output has on costs cost
analysis Bible
behavior is concerned with the way
different types of production costs
change with changes in activity levels
understanding cost behavior is central
to budgeting costing and decision-making
cost behavior tends to classify cost as
fixed costs variable costs semi variable
costs and stepped costs fixed costs are
those costs that are not affected by
changes in quantities of output as
activity levels increase fixed cost stay
the same
probably the best example of a fixed
cost would be a factory's rent no matter
how much units a factory produces the
rent costs are the same a good visual
representation of behavioral costs is
via a graph here is what fixed costs
would look like as you see no matter how
much the activity level increases the
costs remain constant variable costs are
costs that are directly related to
changes in quantities of output as
activity levels increase variable costs
increase in proportion to them so for
example if the number of units produced
doubles so will the variable costs or if
the number of units produced goes up by
10 percent variable costs go up by 10
percent also semi variable costs are
costs that have both a fixed cost
element and a variable cost element the
best example to explain semi variable
costs are telephone bills with a
landline you have the fixed line rental
charge and a variable call cost charge
stepped costs are costs that are fixed
up to a certain level of activity once
that activity level is reached there is
an additional cost again fixed up to a
certain level of activity and so forth
a good example of stepped costs will be
supervisor costs if for example one
supervisor is required for every ten
workers as the number of workers
increase so will the supervisory costs
behavioral costs are all relevant within
a range of activity this means the
activity level over which the observed
cost behavior is valid understanding
cost behavior is very important for
management's planning and control
processes for example the fixed cost of
rent is only fixed up to the capacity of
the unit rented once this is exceeded
new or additional premises will need to
be rented and this fixed cost becomes a
stepped cost therefore managers must use
cost behavior to predict costs within a
cost behavior range